Free-Market-and-Its-Enemies

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The Free Market andIts Enemies:

Pseudo-Science, Socialism, and Inflation



LUDWIG VON MISES



The Free Market andIts Enemies:Pseudo-Science, Socialism, and Inflation

B Y LUDWIG VON MISES

With an Introduction by Richard M. Ebeling

Lecture Transcriptions by Bettina Bien Greaves

FOUNDATION FOR ECONOMIC EDUCATION

Irvington-on-Hudson, NY 10533



This book is published by the Foundation for Economic Education, a foundation established to

study and advance the first principles of freedom.

©2004 Foundation for Economic Education. All rights reserved.

Frontispiece photograph of Ludwig von Mises courtesy of Richard M. Ebeling.

Printed in the United States of America

08 07 06 05 04 5 4 3 2 1

Cataloging-in-Publication Data on file with the Library of Congress

ISBN 1–57246–208–6

Foundation for Economic Education

30 S. Broadway

Irvington-on-Hudson, NewYork 10533



Acknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vii

Introduction by Richard Ebeling. . . . . . . . . . . . . . . . . . . . . . . ix

1S T LE C T U R E Economics and Its Opponents . . . . . . . . . . . 1

2N D LE C T U R E Pseudo-Science and Historical

Understanding . . . . . . . . . . . . . . . . . . . . . . . 6

3R D LE C T U R E Acting Man and Economics. . . . . . . . . . . . . 13

4T H LE C T U R E Marxism, Socialism, and Pseudo-Science. . . . 21

5T H LE C T U R E Capitalism and Human Progress . . . . . . . . . . 33

6T H LE C T U R E Money and Inflation . . . . . . . . . . . . . . . . . . 43

7T H LE C T U R E The Gold Standard:

Its Importance and Restoration . . . . . . . . . . 52

8T H LE C T U R E Money, Credit, and the Business Cycle . . . . . 62

9T H LE C T U R E The Business Cycle and Beyond . . . . . . . . . 73

Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85

CONTENTS



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These lecture s , d e l ive red by Ludwig von Mises at the Fo u n -

dation for Economic Education in the summer of 1951, would not

exist if not for Bettina Bien Greaves, who took them down word

for word in shorthand, and who kindly made the transcriptions

available to FEE. Mrs. Greaves served as a senior staff member at

the Foundation for almost 50 years, until her retirement in 1999.

She and her late husband, Percy L. Greaves, Jr., were among

Mises’s closest friends. Her appreciation and understanding of

Mises’s works have helped keep his legacy alive for a new genera-

tion of friends of freedom.

The publication of these lectures has been made possible

through the kind generosity of Mr. Sheldon Rose of Farmington

Hills,Michigan,and the Richard E.Fox Foundation of Pittsburgh,

Pennsylvania, and the especially the unstinting support of the Fox

Foundation’s senior executor, Mr. Michael Pivarnik.M rs . Beth Hoffman, m a n a ging editor of FEE’s monthly publ i-

c a t i o n , The Freeman, has ove rseen the preparation of the manu s c ri p t

f rom beginning to end with her usual professional care.

ACKNOWLEDGMENTS



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ix

OVER A TWELVE-DAY PERIOD, from June 25 to July 6, 1951, the inter-

nationally renowned Austrian economist Ludwig von Mises delivered aseries of lectures at the Foundation for Economic Education (FEE) at its

headquarters in Irvington-on-Hudson, NewYork. Bettina Bien Greaves, a

FEE staff member at that time, took down Mises’s lectures in shorthand,

word for word, and then transcribed them into a full manuscript. It has

remained unpublished until now.

FEE is proud to finally make these lectures available to a new genera-

tion. Mises was almost 70 years old when he spoke the words that are in

this text, but they reveal a vitality of mind that is youthful in its clarity andvision of the free market and its critical analysis of freedom’s enemies.

Ludwig von Mises: His Life and Contributions

During the decades before Mises gave these lectures at FEE he had

established himself as one of the leading voices of freedom in the Western

world.1

Ludwig von Mises was born on September 29, 1881, in Lemberg, the

capital of the province of Galicia in the old Austro-Hungarian Empire

( n ow known as Lvov in we s t e rn Ukraine). He graduated from the

University of Vienna in 1906 with a doctoral degree in jurisprudence, and

INTRODUCTION

by Richard M. Ebeling

1 On Mises’s life and contributions to economics and the philosophy of freedom,see Richard M. E b e l i n g , Au s t rian Economics and the Political Economy of Freedom(Northampton, Mass.: Edward Elgar, 2003), Ch. 3, “A Rational Economist in anIrrational Age: Ludwig von Mises,” pp. 61–99; and Richard M. Ebeling, “Planning for Freedom: Ludwig von Mises as Political Economis t and Policy A n a l y s t ” in Richard M.E b e l i n g , e d . , Competition or Compulsion: The Market Economy versus the New Social

Engineering (Hillsdale, Mich.: Hillsdale College Press, 2001), pp. 1–85; see also MurrayN. Rothbard, Ludwig von Mises: Scholar, Creator, Hero (Auburn, Ala.: Ludwig von MisesI n s t i t u t e, 1 9 8 8 ) , and Israel M. K i r z n e r, L u dwig von Mises ( Wi l m i n g t o n , D e l . : ISIBooks, 2001).



a specialization in economics. After briefly working as a law clerk, he was

hired by the Vienna Chamber of Commerce, Crafts, and Industry in 1909,

and within a few years was promoted to the position of one of the

Chamber’s senior economic analysts.

Mises was soon recognized as one of the most insightful and pene-

trating minds in Austria. In 1912, he published The Theory of Money and

Credit, a book that was quickly hailed as a major work on monetary theory

and policy, in which he first presented what became known as the Austrian

Theory of the Business Cycle. Inflations and depressions were not inherent

within a free-market economy, Mises argued, but were caused by govern-

ment mismanagement of the monetary and banking systems.2

His scholarly work was interrupted in 1914,however,with the comingof the First World War. For the next four years, Mises served as an officer

in the Austrian Army, most of that time on the eastern front against the

Russian Army. He was three times decorated for bravery under fire.After

Lenin and the Bolsheviks signed a separate peace with Imperial Germany

and Austria-Hungary in March 1918 that withdrew Russia from the war,

Mises was appointed the officer in charge of currency control in that part

of the Ukraine occupied by the Austrian Army under the terms of the

peace treaty, with his headquarters in the port city of Odessa on the BlackSea. During the last several months of the war, before the armistice of

November 11, 1918, Mises was stationed in Vienna serving as an economic

analyst for the Austrian High Command.

After being mustered out of the army at the end of 1918, he returned

to his duties at the Vienna Chamber of Commerce, with the additional

responsibility, until 1920, of being in charge of a branch of the League of

Nations’ Reparations Commission overseeing the settlement of prewar

debt obligations.In the years immediately following the war, Austria was in a state of

chaos.The old Austro-Hungarian Empire broke up, leaving a new, much

smaller Republic of Austria. Hyperinflation and aggressive trade barriers by

neighboring countries soon reduced much of the Austrian population to

near-starvation conditions. In addition, there were several attempts to

x

2 Ludwig von Mises, The Theory of Money and Credit (Indianapolis: Liberty Classics

[1912; revised eds., 1924, 1953] 1980); and also by Mises, “Monetary Stabilization andCyclical Policy” [1928] reprinted in Israel M. Kirzner, ed., Austrian Economics: ASampling in the History of a Tradition,Vol. 3: The Age of Mises and Hayek (London:WilliamPickering, 1994), pp. 33–111.

T H E F R E E M A R K E T A N D I T S E N E M I E S



xi

violently establish a revolutionary socialist regime in Austria, as well as

border wars with Czechoslovakia, Hungary, and Yugoslavia.

From his position at the Vienna Chamber of Commerce, Mises fought

day and night to ward off the collectivist destruction of his homeland. He

was influential in stopping the full nationalization of Austrian industry by

the government in 1918–1919. He also played a leading role in bringing

the hyperinflation in Austria to a halt in 1922, and then was a guiding

voice in reorganizing the Austrian National Bank under a re-established

gold standard under League of Nations supervision. He also forcefully

made the case for drastically lowering the income and business taxes that

were strangling all private-sector activities, and assisted in bringing to an

end the gove rn m e n t ’s foreign-exchange controls that we re ru i n i n gAustria’s trade with the rest of the world.3

Throughout the 1920s and early 1930s, while in his native Austria,

Mises was an uncompromising defender of the ideals of individual liberty,

limited government, and the free market. Besides his work at the Vienna

Chamber of Commerc e, he taught a seminar eve ry semester at the

University of Vienna on various aspects of economic theory and policy,

which attracted not only many of the brightest Austrian students but atten-

dees from the rest of Europe and the United States as well. He also led a“private seminar” that met twice a month from October to June in his

Chamber offices, from 1920 to 1934, with many of the best Viennese

minds in economics, political science, history, philosophy, and sociology

regularly participating.

Mises also founded the Austrian Institute for Business Cycle Research

in 1926. He served as acting vice-president, with a young Friedrich A.

Hayek appointed as the Institute’s first director.

His international stature as a champion of classical liberalism continuedto grow during this period, as well, through a series of books that chal-

lenged the rising tide of socialism and the interventionist-welfare state. In

3 On Mises’s work as an economic policy analyst and advocate of the free market inAustria in the years between the two World Wars, see Richard M. Ebeling, “TheEconomist as the Historian of Decline: Ludwig von Mises and Austria Between the TwoWorld Wars” in Richard M. Ebeling, ed., Globalization:Will Freedom or World Government Dominate the International Marketplace? (Hillsdale, Mich.: Hillsdale College Press, 2002),

pp. 1–68. Many of Mises’s articles and policy papers dur ing this period are now available;see Richard M. Ebeling, ed., Selected Writings of Ludwig von Mises,Vol. 2: Between the TwoWorld Wa r s : M o n e t a ry Disord e r, I n t e rve n t i o n i s m , Socialism and the Great Depression(Indianapolis: Liberty Fund, 2002).

I N T RO D U C T I O N



1919, Mises published Nation, State and Economy, in which he traced out

the causes of the First World War in the nationalist, imperialist, and socialist

ideas of the preceding decades.4 But it was in a 1920 article on “Economic

Calculation in the Socialist Commonwealth”5 and his 1922 book on

Socialism: An Economic and Sociological Analysis that his reputation as the

leading opponent of collectivism in the twentieth century was firmly

established.6 Mises demonstrated that with the nationalization of the means

of production, and the resulting abolition of money, market competition,

and the price system, socialism would lead to economic chaos and not to

social prosperity. Thus, besides the tyranny that socialism would create due

to the government’s domination over all aspects of human life, it was also

inherently unworkable as an economic system.This was followed in 1927 with his defense of all facets of individual

freedom in his book on Liberalism, by which he meant classical liberalism

and the market economy. He presented a clear and persuasive case for indi-

vidual liberty, private property, free markets, and limited government.7

Finally, in 1929, Mises published a collection of essays offering a Critique of

Interventionism, in which he showed that government piecemeal regulations

over prices and production inevitably lead to distortions and imbalances

that threaten the effective functioning of a free and competitive marketsociety.8 In addition, he penned a series of essays on the philosophy of

science and the nature of man and the social order that appeared in 1933

under the title Epistemological Problems of Economics.9

Mises had clearly understood during this time that Hitler’s National

Socialism would lead Germany down the road to destruction. In fact, in

the mid-1920s, he had already warned that too many Germans were

hoping for the coming of the tyrant who would rule over and plan their

xii

4 Ludwig von Mises, Nation, State and Economy: Contributions to the Politics and History of Our Time (NewYork: NewYork University Press [1919] 1983).

5 Ludwig von Mises, “Economic Calculation in the Socialist Commonwealth” [1920]reprinted in Israel M. Kirzner, ed., Austrian Economics: A Sampling in the History of aTradition,Vol. 3: The Age of Mises and Hayek, pp. 3–35.

6 Ludwig von Mises, Socialism: An Economic and Sociological Analysis (Indianapolis: LibertyClassics [1922; revised eds., 1932, 1951] 1981).

7 Ludwig von Mises, Liberalism: The Classical Tradition (Irvington-on-Hudson, N.Y.:Foundation for Economic Education [1927] 1995).

8 Ludwig von Mises, Critique of Interventionism (Irvington-on-Hudson, N.Y.: Foundationfor Economic Education [1929] 1996).

9 Ludwig von Mises, Epistemological Problems of Economics ( N ew Yo r k : N ew Yo r kUniversity Press [1933] 1981).




xiii

lives.10 When the Nazis came to power in Germany in 1933, Mises under-

stood that the future of his native A u s t ria was now thre a t e n e d . As a

classical liberal and a Jew, Mises also knew that a Nazi take over wo u l d

probably mean his arrest and death. So, in 1934 he accepted a position as

professor of international economic relations at the Graduate Institute of

International Studies in Geneva, Switzerland, a position that he held until

he came to the United States in the summer of 1940.11

It was during those six years in Switzerland that Mises wrote his

greatest work, the German-language edition of which was published in

Geneva in 1940,12 and which then appeared in 1949 in a revised English-

language version as Human Action:A Treatise on Economics.13 In a volume of

almost 900 pages, Mises summarized the ideas and reflections of a lifetimeon the issues of man, society, and government; on the nature and workings

of the competitive market process and the impossibilities of socialist central

planning and the interventionist state; and on the central role and impor-

tance of a sound monetary system for all market activities, and the harmful

effects from government’s manipulation of money and credit.

In the summer of 1940, as the German Army was overrunning France,

Mises and his wife, Margit, left neutral Switzerland and made their way

through southern France and across Spain to Lisbon,Portugal, from wherethey then sailed to the United States. Living in NewYork City, he received

research grants from the Rockefeller Foundation in the early 1940s that

enabled him to do a number of studies on postwar economic and political

reconstruction, as well as write several books.14 In 1945, he was appointed

to a visiting professorship at NewYork University, a position that he held

until his retirement in 1969 at the age of 87.

10 In his 1926 essay,“Social Liberalism,” reprinted in Critique of Interventionism, p. 67, Miseswarned that during the time of ideological confusion and political instability in theGermany of the 1920s, “Some are taking refuge in mysticism, others are setting their hopes on the coming of the ‘strong man’—the tyrant who will think for them andcare for them.”

11 On the Graduate Institute of International Studies and its founder,William E. Rappard,see Richard M. Ebeling, “William E. Rappard: An International Man in an Age of Nationalism,” Ideas on Liberty (Jan. 2000), pp. 33–41.

1 2 Ludwig von Mises, N a t i o n a l ö k o n o m i e :T h e o rie des Handelns und W i rt s ch a f t e n s (Munich:Philosophia Verlag [1940] 1980).

13 Ludwig von Mises, Human Action:A Treatise on Economics (Irvington-on-Hudson, N.Y.:Foundation for Economic Education [1949; revised eds., 1963, 1966] 1996).14 A number of Mises’s essays from this period, 1940–1944, are included in Richard M.

Ebeling, ed., Selected Writings of Ludwig von Mises, Vol. 3: The Political Economy of International Reform and Reconstruction (Indianapolis: Liberty Fund, 2000).

I N T R O D U C T I O N



During his years in America, Mises continued his prolific writing

career, publishing Bureaucracy (1944),15 Omnipotent Government (1944),16

Planned Chaos (1947),17 Planning for Freedom (1952),18 The Anti-Capitalistic

Mentality (1956),19 Theory and History (1957),20 The Ultimate Foundation of

Economic Science (1962),21 and The Historical Setting of the Austrian School of

Economics (1969).22 There also appeared, posthumously, his memoirs, Notes

and Recollections (1978),23 and Interventionism:An Economic Analysis (1998),24

both originally written in 1940.And many of his other articles and essays

have been collected in two anthologies.25

Mises also attracted around him a new generation of young Americans

dedicated to the ideal of liberty and economic freedom, and who were

encouraged and assisted by Mises in their intellectual activities. He passedaway on October 10, 1973, at the age of 92.

Ludwig von Mises and FEE

There was a long relationship between Ludwig von Mises and the

Foundation for Economic Education. The late Leonard E. Read, the

founder and first president of FEE, met Mises in the early 1940s. Read told

the story of their meeting in an essay he wrote in honor of Mises’s 90th

birthday:

xiv

15 Ludwig von Mises, Bureaucracy (New Haven:Yale University Press, 1944).16 Ludwig von Mises,Omnipotent Government:The Rise of the Total State and Total War (New

Haven: Yale University Press, 1944).17 Ludwig von Mises, Planned Chaos (Irvington-on-Hudson, N.Y.: Foundation for

Economic Education, 1947).18 Ludwig von Mises,Planning for Freedom (Grove City, Pa.:Libertarian Press [1952; revised

ed., 1962, 1980] 1996).1 9 Ludwig von Mises, The Anti-Capitalistic Mentality ( P ri n c e t o n : D.Van Nostrand, 1 9 5 6 ) .20 Ludwig von Mises, Theory and History: An Interpretation of Social and Economic Evolution

(Auburn, Ala.: Ludwig von Mises Institute [1957] 1985).21 Ludwig von Mises, The Ultimate Foundation of Economic Science: An Essay on Method

(Irvington-on-Hudson, N.Y.: Foundation for Economic Education [1962] 2002).22 Ludwig von Mises, “The Historical Setting of the Austrian School of Economics”

[1969] reprinted in Bettina Bien Greaves, ed., Austrian Economics: An Anthology(Irvington-on-Hudson, N.Y.: Foundation for Economic Education, 1996), pp. 53–76.

23 Ludwig von Mises, Notes and Recollections (South Holland, I l l . : L i b e rt a rian Press[1940] 1978).

24 Ludwig von Mises, Interventionism:An Economic Analysis (Irvington-on-Hudson, N.Y.:

Foundation for Economic Education [1940] 1998).25 See Richard M. Ebeling, ed., Money, Method and the Market Process: Essays by Ludwig vonMises (Norwell, Mass.: Kluwer Academic Press, 1990), and Bettina Bien Greaves, ed.,Economic Freedom and Interventionism: An Anthology of Articles and Essays by Ludwig vonMises (Irvington-on-Hudson, N.Y.: Foundation for Economic Education, 1990).




xv

Professor Ludwig von Mises arrived in America during 1940.

My acquaintance with him began a year or two later when he

addressed a luncheon meeting of the Los Angeles Chamber of

Commerce of which I was General Manager. That evening he

dined at my home with renowned economists Dr. Benjamin M.

Anderson and Professor Thomas Nixon Carver, and several

businessmen such as W. C. Mullendore, all first-rate thinkers in

political economy. What I would give for a recording of that

memorable discussion!

The final question was posed at midnight:“Professor Mises, I

agree with you that we are headed for troublous times. Now, let us

suppose you were the dictator of these United States.What would you do?”

Quick as a flash came the reply, “I would abdicate!” Here we

have the renunciation side of wisdom: man knowing he should

not lord it over his fellows and rejecting even the thought.

Few among us are wise enough to know how little we know.

. . . A rare individual weighs his finite knowledge on the scale of

infinite truth, and his awareness of his limitation tells him never to

lord it over others. Such a person would renounce any position of authoritarian rulership he might be proffered or, if accidentally

finding himself in such a position, would abdicate—forthwith! . . .

Professor Mises knows that he does not or cannot rule; thus,

he abdicates from even the idea of rulership. Knowing what phase

of life to renounce is one side of wisdom.26

From FEE’s founding in 1946, Ludwig von Mises served as a senior

adviser, lecturer, writer, and part-time staff member for the Foundation. Itwas through Mises’s influence and that of free-market economist and jour-

nalist Henry Hazlitt (one of FEE’s original trustees) that the Foundation

has always had a special “Austrian School” orientation to its economic

analysis of free markets and collectivism.27

26 Leonard E. Read, “To Abdicate or Not” in F. A. Harper, ed., Toward Liberty: Essays in

Honor of Ludwig von Mises on the Occasion of His 90th Birthday, September 29, 1971,Vol. 2(Menlo Park, Calif.: Institute for Humane Studies, 1971), pp. 299–301.

27 Mary Sennholz, Leonard E. Read: Philosopher of Freedom (Irvington-on-Hudson, N.Y.:Foundation for Economic Education, 1993), p. 140.




It was also through the assistance of Leonard Read and a few others

among Mises’s friends that funding was arranged to underwrite his

teaching position at NYU, until his retirement in 1969. And following his

departure from NYU, Leonard Read brought Mises onto FEE’s staff for

the remainder of his life.

Mises’s wife,Margit, described his appreciation of FEE and the oppor-

tunity to lecture at the Foundation:

In October 1946, Lu was made a regular member of the FEE staff,

and in later years he promised to give a series of lectures in

Irvington every year. The spiritual and intellectual atmosphere

there was completely to his taste.* * *

One of the regular tasks of the Foundation was to arrange

seminars for teachers, journalists and students. Lu enjoyed speaking

there. He knew the participants were carefully questioned about

their education and interests and were eager to hear him. It was

interesting to note how many women attended these seminars.

Before the classes started, Lu regularly made the rounds. First,

he had a little talk with Read; then he went to see Edmund Opitz,for whom he had a special appreciation; then he visited with

W. Marshall Curtiss and Paul Poirot. Paul usually had to discuss an

article he was about to publish in The Freeman, FEE’s monthly

magazine. Finally, Lu went into Bettina Bien’s office. As a rule,

Bettina had a pile of his books ready for him to autograph or

letters to sign, which were typed for him in his office.On his way

down to the lecture hall—all these offices, with the exception of

that of Dr. Opitz, were on the second floor—he had a friendlyword for every one of the employees.

His lectures were calculated for a special Irvington audience.

He was able to evaluate his listeners immediately by asking one or

the other question. . . . Though the content of his lectures in

Irvington was lighter,his mode of delivery was the same as at New

York University.The interest was great and so was the demand for

Lu’s books, which Leonard Read always kept in print and ready

for distribution.28

xvi

28 Margit von Mises, My Years with Ludwig von Mises (Cedar Falls, Iowa: Center for Futures Education [1976] 2nd enlarged ed., 1984), pp. 94–95.




xvii

Mises’s last public lecture was delivered at FEE on March 26, 1971. As

Margit von Mises explained:“He always loved lecturing in Irvington, and

he continued doing so as long as he felt able.”29

When Mises passed away, Leonard Read delivered a brief eulogy at the

memorial service for him on October 16, 1973. He said, in part:

The proudest tribute mankind can pay to one it would most

honor is to call him Teacher.The man who releases an idea which

helps men understand themselves and the universe puts mankind

forever in his debt. . . . Ludwig von Mises is truly—and I use this

in the present tense—a Teacher. More than two generations have

studied under him and countless thousands of others have learnedfrom his books. Books and students are the enduring monuments

of a Teacher and these monuments are his. . . . We have learned

more from Ludwig Mises than economics.We have come to know

an exemplar of scholarship, a veritable giant of erudition, steadfast-

ness, and dedication.Truly one of the great Teachers of all time!

And so, all of us salute you, Ludwig Mises, as you depart this

mortal life and join the immortals.30

The FEE Lectures of 1951

For those readers who are already familiar with some of Mises’s works,

his 1951 lectures at FEE will offer them a slightly different style to his

analysis. Here is Mises the teacher. The form of exposition that Bettina

Bien Greaves has captured in her detailed shorthand of his lectures is more

colloquial, and full of many historical examples and references.The reader

is able to feel, at least a bit, what Mises was like face to face in the class-

room, and not simply the Olympian theorist in his great tomes.One of Mises’s students who studied with him at NewYork University

once said that “Every lecture was a mind-stretching experience.”Another

student declared that “I have never known a man as erudite as was Dr.

Mises. He was extraordinarily learned in every field of knowledge. In

discussing economics he would bring in examples from history to illustrate

29 Ibid., pp. 177–178.30 Leonard Read,Castles in the Air (Irvington-on-Hudson, N.Y.: Foundation for Economic

Education, 1975), pp. 150–151.




the points he was making.”31 His FEE lectures from 1951 give a taste of

this side of Mises as a scholar-teacher.

For the readers who are relatively unfamiliar with Mises writings, these

lectures offer an excellent starting point. Indeed, in many ways the lectures

present an encapsulated version of most of the themes that Mises devoted

his life to formulating, a summary of many of the central themes to be

found in Human Action. He explains the nature of man as a purposeful

actor who gives meaning to his actions in the context of ends chosen and

means selected to achieve his goals. It is the intentionality of man that

makes the human sciences inherently different from the subject matter of

the natural sciences. This also enables Mises to demonstrate why Karl

Marx’s theory of dialectical materialism and historical determinism isfundamentally myth and fantasy.

Instead, he shows the actual workings of the market process through

which economic freedom provides the incentives and the personal liberty

for individuals to work, save, and invest. He explains how it is the

consumer-driven demand for goods and services that provides the stimulus

and profit opportunities for entrepreneurs to creatively arrange and guide

production in ways that serve the wants and desires of the buying public.

He also demonstrates that the market process is dependent upon andwould be impossible without the emergence of a medium of exchange—

money—through which all the myriad of goods and resources can be

reduced to a common denominator in the form of money prices.

Economic calculation in the form of market prices provides the method

through which entrepreneurs are able to estimate potential profits and

possible losses from alternative lines and methods of production.Through

this process, waste and misuse of scarce resources are kept to a minimum,

so that as many of the most highly valued goods and services desired byconsumers may be brought to market.

This also leads Mises to explain why socialist central planning means

the end of all economic rationality. With the abolition of markets and

prices under socialism, the central planners are clueless about how to effi-

ciently apply the resources, capital, and labor under their control. Hence,

socialism in practice means planned chaos.

At the same time, Mises shows why government mismanagement of

xviii


31 Ibid., p. 132.



xix

the monetary and banking system brings about inflations and depressions.

By distorting the price signals of the marketplace—including interest

rates—government-generated inflations bring about a misdirection of

resources and labor and a malinvestment of capital, which finally must lead

to a depression.

Through these lectures, the reader will see why Ludwig von Mises was

one of the most effective proponents of freedom and free enterprise in the

twentieth century. And why his contributions will remain as one of the

great legacies in the cause of liberty in the many decades to come.




AMONG THE GREAT BOOKS OF MANKIND are the immortal writings by the

Greek philosopher Plato. The Republic andThe Laws, written 2300 to 2400

years ago, dealt not only with philosophy, the theory of knowledge, episte-

mology, but also with social conditions.The treatment of these problems

was typical of the approach which philosophical and sociological problems,discussions of state, government, and so on, continued to receive for more

than 2000 years.

Although this approach is familiar to us, a new point of view toward

social philosophy, the sciences, economics, and praxeology has developed

during the last hundred years. Plato had said that a leader is called on by

“Providence” or by his own eminence, to reorganize and to construct the

world in the same way that a builder constructs a bu i l d i ng—without

bothering with the wishes of his fellowmen. Plato’s philosophy was thatmost men are “tools” and “stones” to be worked with for the construction

of a new social entity by the “superman” in control.The cooperation of the

“subjects” is unimportant for the success of the plan.The only requirement

is that the dictator have the requisite power to force the people. Plato

assigns to himself the specific task of being adviser to the dictator, the

specialist, the “social engineer” reconstructing the world according to his

plan. A comparable situation today may be seen in the position of the

college professor who goes to Washington.The Platonic pattern remained the same for almost 2,000 years.All the

books of that era were written from this point of view. Each author was

convinced that men were merely pawns in the hands of the princes, the

1

Economics and ItsOpponents

1 S T L E C T U R E



police, and so on.Anything could be done, provided the government was

strong enough. Strength was considered the greatest asset of government.

An indication of the success of this thinking may be realized in reading

the adventures of Télémaque by Bishop Fénelon [François de Salignac de la

Mothe Fénelon, 1651–1715]. Bishop Fénelon, a contemporary of Louis

XIV, was an eminent and great philosopher, a critic of government, and

tutor to the Duke of Burgoyne, heir to the French throne. Télémaque,

written for the young Duke’s education, was used in French schools until

recently.The book tells of world travels. In each country visited, all that is

good is credited to the police; everything of value is attributed to the

government.This is known as the “science of the police”—or in German

Polizeiwissenschaft.The eighteenth century saw a new discovery—the discovery of a

different approach to social problems.The idea developed that there was a

regularity in the sequence of social problems similar to the regularity in the

sequence of natural phenomena. It was learned that legal decrees and their

enforcement alone would not remove an ill. The regular sequence or

concatenation of social phenomena must be studied to find out what

can be done, and what should be done. Although regularity had been

recognized in the field of the natural sciences, the existence of order andof regular sequences also in the field of social problems had not been

recognized before.

The Utopian conditions of the natural state, as described by Jean

Jacques Rousseau [1712–1778], are transformed, it was held, by “wicked”

men and by their evil social institutions to produce the destitution and

misery that exists. It was believed that the happiest man—the one living

under the most satisfactory conditions—was the Indian of North America.

North American Indians were idealized in European literature of that time;they were considered happy because they were not acquainted with

modern civilization.

Then came Thomas Robert Malthus [1766–1834] with the discovery

that nature does not provide the means of existence for everybody.

Malthus pointed out that there prevails for all humans a scarcity of the

requirements of subsistence.All men are in competition for the means of

survival and for a share of the world’s wealth. The aim of man was to

remove the scarcity and make it possible for a greater number of persons

to survive.

Competition leads to the division of labor and to the development of

cooperation.The discovery that the division of labor is more productive

2




3

than isolated labor was the happy accident that made social cooperation,

social institutions, and civilization possible.

If all production is consumed immediately, any improvement of condi-

tions would be impossible. Improvement is possible only because some

production is saved for use in later production—that is only if capital is

accumulated. Savings are important!

In the eyes of all reformers such as Plato, the “body politic” could not

operate without interference from the top. Intervention by the “king,” by

government, and by the police was necessary to obtain action and results.

Remember that this was also the theory of Fénelon; he described the

streets, factories, and all progress as being due to the police.

In the eighteenth century, it was discovered that even in the absenceof the police—even if no one gives orders—people naturally act in such

a way that the fruits of production finally appear.Adam Smith [1723–1790]

cited the shoemaker.The shoemaker doesn’t make shoes from an altruistic

motive; the shoemaker provides us with shoes because of his own selfish

interest. Shoemakers produce shoes because they want the products of

others which they can get in exchange for shoes. Every man, in serving

himself, of necessity serves the interest of others.The “king” doesn’t have

to issue orders. Action is brought about, therefore, by the autonomousactions of people in the market.

The eighteenth century’s discoveries with respect to social problems

were closely connected with, and inseparable from, the political changes

brought about during that period—the substitution of representative for

autocratic government, free trade for protection, the tendency toward

international peace instead of aggressiveness, the abolition of serfdom and

slavery, and so on. The new political philosophy also led to substituting

liberty for monarchism and absolutism. And it brought about changesin industrial life and social life which altered the fact of the world in a very

short time. This transformation is customarily called the Industrial

Revolution.And this “revolution” resulted in changes in the whole struc-

ture of the world, populations multiplied, the average length of life

expectancy increased, and standards of living rose.

With specific reference to the population, it is four times greater today

[1951] than it was more than 250 years ago. If Asia and Africa are elimi-

nated, the growth is even more startling. Great Britain, Germany, and Italy,

three countries that were completely settled and where every bit of land

was already in use by 1800, found room to support 107 million more

E C O N O M I C S A N D I T S O P P O N E N T S



people by 1925. (This seems all the more remarkable when compared with

the United States—many times the area of these three countries—which

increased its population by only 109 million in that same period.) At the

same time, the standard of living was raised everywhere as a result of the

Industrial Revolution by the introduction of mass production.

Of course, there are still unsatisfactory conditions; there are still

situations that can be improved. To this, the new philosophy responds:

There is only one way to improve the standard of living of the population — increase

capital accumulation as against the increase in population. Increase the amount of

capital invested per capita.

Although this new doctrine of economic theory was true, it was

unpopular for many reasons with certain groups—monarchs, despots, andnobles—because it endangered their vested interests. In the nineteenth

and twentieth centuries, these opponents of this eighteenth-century

philosophy developed a number of objections, epistemological objections

which attacked the basic foundation of the new philosophy and raised

many very serious and important problems.Their attack was more or less

a philosophical attack, directed at the epistemological foundations of the

new science. Almost all their criticism was motivated by political bias; it

was not brought forth by searchers for the truth. However, this does notalter the fact that we should study seriously the objections to the various

truths of the eighteenth century—sound philosophy and economics—

without reference to the motives of those who bring them forth. Some

were well founded.

During the last hundred years, opposition to sound economics has

arisen.This is a very serious matter.The objections raised have been used

as arguments against the whole bourgeois civilization. These objections

cannot be simply called “ridiculous” and dismissed.They must be studiedand critically analyzed.As far as the political problem is concerned, some

people who supported sound economics did so in order to justify, or to

defend, the bourgeois civilization. But these defenders didn’t know the

whole story.They limited their fighting to a very small territory, similar to

the situation today in Korea where one army is forbidden to attack the

strongholds of the other army.1 In the intellectual struggle, the same

4


1 [After the capture of the North Korean stronghold, Pyongyang, it became evident that

the armies of Communist China were amassing for attack north of the Yalu River,the boundary between North Korea and Communist-controlled Manchuria. Yetrequests by General Douglas MacArthur to do anything to forestall an attack weredenied; his planes were not allowed to bomb the bridges over the Yalu; and the RedChinese forces were even granted a five-mile-deep sanctuary south of the Yalu wherethey could assemble.—Ed.]



5

situation exists; the defenders are fighting without attacking the real

foundation of their adversaries.We must not be content to deal with the

external paraphernalia of a doctrine; we must attack the basic philosoph-

ical problem.

The distinction between “left” and “right” in politics is absolutely

worthless. This distinction has been inadequate from the very beginning

and has brought about a lot of misunderstanding. Even objections to the

basic philosophy are classified from that point of view.

Auguste Comte [1798–1857] was one of the most influential philoso-

phers of the nineteenth century, and probably one of the most influential

men of the last hundred years. In my own private opinion, he was a lunatic

as well.Although the ideas he expounded were not even his own, we mustdeal with his writings because he was influential and especially because he

was hostile to the Christian church. He invented his own church, with its

own holidays. He advocated “real freedom,” more freedom, he said, than

was offered by the bourgeoisie.According to his books, he had no use for

metaphysics, for freedom of science, for freedom of the press, or for

freedom of thought.All these were very important in the past because they

gave him the opportunity to write his books, but in the future there would

be no need for such freedom because his books had already been written.So the police must repress these freedoms.

This opposition to freedom, the Marxian attitude, is typical of those

on the “left” or “progressive” side. People are surprised to learn that

the so-called “liberals” are not in favor of freedom. Georg Wilhelm

Friedrich Hegel [1770–1831], the famous German philosopher, gave rise

to two schools—the “left” Hegelians and the “right” Hegelians. Karl Marx

[1818–1883] was the most important of the “left” Hegelians. The Nazis

came from the “right” Hegelians.The problem is to study basic philosophy. One good question is why

have the Marxists been to a certain extent familiar with the great philo-

sophical struggle, while the defenders of freedom were not? The failure of

the defenders of freedom to recognize the basic philosophical issue

explains why they have not been successful.We must first understand the

basis for the disagreement; if we do, then the answers will come.We will

now proceed to the objections that have been raised to the eighteenth-

century philosophy of freedom.

E C O N O M I C S A N D I T S O P P O N E N T S



IN THE ENGLISH LANGUAGE, the word “science” is usually applied only

to the natural sciences. T h e re is no doubt that there are fundamental

differences between the natural sciences and the science of human action,

sometimes called social science or history. Among these fundamental

differences is the way in which knowledge is acquired.

In the natural sciences knowledge comes from experiment; a fact is

something experimentally established. Natural scientists, in contrast to

students of human action, are in a position of being able to control

changes. They can isolate the various factors involved, as in a laboratory

experiment, and observe changes when one factor is changed.The theory

of a natural science must conform to these experiments—they must never

contradict such an established fact. Should they contradict such a fact,

a new explanation must be sought. In the field of human action, weare never in a position of being able to control experiments.We can never

talk of facts in the field of social sciences in the same sense in which we

refer to facts in the natural sciences. Experience in the field of human

action is complicated, produced by the cooperation of various factors, all

effecting change.

In the field of nature we have no knowledge of final causes. We do not

know the ends for which some “power” is striving. Some persons have

attempted to explain the universe as if it had been intended for the use of man. But questions can then be raised:What is the value to man of flies,

for instance, or of germs? In the natural sciences we know nothing but

experience. We are familiar with certain phenomena and on the basis of

6

Pseudo-Science andHistorical Understanding

2 N D L E C T U R E



7

experiments a science of mechanics has been developed. But we do not

know what electricity is.We don’t know why things happen the way they

do; we don’t ask. And if we do ask, we don’t receive an answer.To say we

know the answer implies that we have ideas of “God.” To assert that we

can find the reason implies that we have certain “God-like” characteristics.

There is always a point beyond which the human mind can go—a

realm into which inquiry brings no more information.Through the years

this frontier has been pushed farther and farther back. Natural forces have

been traced back beyond what was formerly considered “ultimate” human

knowledge. But human knowledge must always stop at some “ultimate

given.”The French physiologist Claude Bernard [1813–1878] said in his

book on experimental science that life itself is something “ultimately

given”; biology can only establish the fact that there is such a phenomenon

as life, but it can say nothing more about it.

The situation is different in the field of history or of human action.

There we can trace our knowledge back to something behind the action;

we can trace it back to the motive. Human actions imply that men are

aiming at definite goals.The “ultimate given” in the field of human action

is the point at which an individual or a group of individuals, inspired by

definite judgments of value and by definite ideas as to the procedures to beapplied to attain a chosen end, acted.This “ultimate given” is individuality.

Being human we know something about human eva l u a t i o n s ,

doctrines, and theories concerning the methods used to reach these ends.

We know there is some purpose behind the various moves of individuals.

We know there is conscious action on the part of each person.We know

there is a sense, a reason.We can establish that there are definite judgments

of value, definite ends aimed at, and definite means applied in the attempt

to gain these ends. For example a stranger, dropped suddenly into aprimitive tribe, although ignorant of the language, can nevertheless

interpret the actions of the people about him to some extent, the ends

toward which they are working, and the means used to attain the ends.

Through logic he interprets their running around building fires and

putting objects in kettles as preparing food for dinner.

Dealing with judgments of value and methods is not peculiar to the

science of human action.The logic of the scientist, the brainwork, is no

different from the logic practiced by everybody in his daily life. The toolsare the same.The aim is not peculiar to social scientists.Even a child crying

and screaming has a motive and is acting to get something he wants.

Businessmen also act to get things they want.They understand the science

P S E U D O - S C I E N C E A N D H I S T O R I C A L U N D E R S T A N D I N G



of human action and in dealing with their fellowmen they act on that

understanding every day, especially in planning for the future.

This epistemological interpretation of the experience of under-

standing is not the invention of a new method. It is only the discovery of

knowledge everybody has been using since time began. Economist Philip

H.Wicksteed [1844–1927], who published The Common Sense of Political

Economy, chose for his motto a quotation from Goethe: Ein jeder lebt’s, nicht

vielen ist’s bekannt. (“We are all doing it; very few of us understand what we

are doing.”)

According to the French philosopher Henri Bergson [1859–1941],

understanding, l’intelligence sympathique, is the basis of the historical

sciences.The historian collects his materials to assist his interpretation just

as a policeman seeks the facts to enable him to reach a decision in court.

The historian, the judge, the entrepreneur, all begin work when they have

collected as much information as possible.

Auguste Comte, who contributed nothing to the development of the

natural sciences, described what he believed to be the task of all sciences:

he said that to be able to forecast and to act it was necessary to know. The

natural sciences give us definite methods for accomplishing this.With the

aid of the various branches of physics, chemistry, and so on, mechanics areable to design buildings and machines and to forecast the results of their

operations. If a bridge collapses, it will be recognized that an error was

made. In human action,no such definite error may be recognized, and this

Comte considered a failing.

Auguste Comte considered history to be non-scientific and con-

sequently valueless. In his mind, there was a certain hierarchy of the various

sciences.According to him, scientific study began with the simplest science

and progressed to the more complicated; the most complicated science wasstill to be developed. Comte said history was the raw material out of which

this complicated study was to develop.This new study was to be a science

of laws, equivalent to the laws of mechanics developed by scientists. He

called this new science “sociology.” His new word “sociology,” has had

enormous success; people in all parts of the world now study and write

about sociology.

Comte knew very well that a general science of human action had

been developed during the previous hundred years—the science of economics, political economy. But Comte didn’t like its conclusions; he

wasn’t in a position to refute them, nor to refute the basic laws from which

8




9

they were derived.So he ignored them.This hostility or ignorance was also

displayed by the sociologists who followed Comte.

Comte had in mind the development of scientific laws. He blamed

history for dealing only with individual instances, with events that

happened in a definite period of history and in a specific geographical

environment. History did not deal with things done by men in general,

Comte said, but with things done by individuals. But sociologists have not

done what Comte said they should; they have not developed general

knowledge.What they have done is just what Comte considered worthless,

they have dealt with individual events and not with generalities. For

instance, a sociological report was published on “Leisure in Westchester.”

Sociologists have also studied juvenile delinquency, methods of punish-

ment, forms of property, and so on. They have written an enormous

amount of material about the customs of primitive people. True, this

literature does not deal with kings or wars; it deals principally with the

“common man.” But still it doesn’t deal with scientific laws; it deals with

historical facts, with historical investigations of what happened at one spot

at a certain time. Such sociological studies are valuable, however, precisely

because they deal with histor ical investigations, investigations of various

aspects of human everyday life often neglected by other historians.Comte’s program is self-contradictory because no general laws can be

determined from the study of history. Observations of history are always

complex phenomena, interconnected in such a way that it is impossible to

assign to specific causes, with unquestioned accuracy, a certain part of the

final result.Therefore, the method of the historian has nothing in common

with the methods of the natural scientist.

The program of Auguste Comte to develop scientific laws from

history has never been realized. So-called “sociology” is either history or psychology. By psychology I do not mean the natural sciences of percep-

tion. I mean the literary psychology described by the philosopher George

Santayana [1863–1952] as the science of the understanding of historical

facts, human evaluations dealing with human strivings.

Max Weber [1864–1920] called himself a sociologist, but he was a

great histori a n . His book Gesammelte Au f s ä t ze zur Religionssoziologie

(Sociology of the Great Religions) deals in the first part, “The Protestant

Ethic and the Spirit of Capitalism,” with the origin of capitalism. Heattributed the development of capitalism to Calvinism and he wrote very

interestingly about it. But whether his theory can be logically supported is

another question.




One essay on “the town”—which has not been translated into

English1 —aimed at treating the city or town as such, at trying to give ideas

about the town in general. He was very explicit in one regard, however,

namely in maintaining that this approach was more valuable than dealing

with the history of one town at a specific time. As a matter of fact, the

situation may be the very opposite; it may be that the more general

historical information is, the less material of value it contains.

With respect to the future, we must form certain opinions about the

understanding of future events.The statesman, the entrepreneur, and, to a

certain extent, everyone is in the same position. Each of us must deal with

uncertain future conditions that cannot be anticipated. The statesman,

the politician, the entrepreneur, and so on, are, so to speak,“historians of

the future.”

There exist in nature constant quantitative relationships—specific

weights, and so on, which may be established in the laboratory. Thus

we are in a position to measure and assign quantities of magnitudes

to va rious physical objects. With the advance of the natural sciences,

their study has become more and more quantitative—v i z . , the

development of quantitative from qualitative chemistry. As Comte said,

“Science is measurement.”In the field of human action, however, especially in the field of

economics, there are no such constant relationships between magnitudes.

Opinions to the contrary have been maintained, however, and even today

many people fail to see that accurate quantitative explanations in the field

of economics are impossible. In the field of human action, we can make

explanations only with specific reference to individual cases.

Ta ke the French Revo l u t i o n , for instance. H i s t o rians search for

explanations of the factors which brought it about. Many factors cooper-ated.They assign values to each factor—the financial situation, the queen,

her influence on the weak king, and so on. All may be suggested as

contributing.Through the use of mental tools,historians attempt to under-

stand the several factors and to assign to each a definite relevance. But how

much each of the various factors influenced the outcome cannot be

answered precisely.

In the natural sciences, the establishment of experimental facts does

10


1 [The first English edition, The City, was translated and edited by Don Martindale andGertrud Neuwirth (Glencoe, Illinois, Free Press, 1958).—Ed.]



11

not depend on the judgment of individuals. Nor on the idiosyncrasies, or

individuality, of the specific scientist. A judgment in the field of human

action is colored by the personality of the man doing the understanding

and offering the explanation. I do not speak of biased persons,nor of those

who are politically partial, nor of persons who attempt to falsify facts. I

refer only to those who are personally sincere. I do not refer to differences

due to developments in other sciences that affect historical facts. I do not

refer to changes in knowledge which affect historical interpretations. Nor

am I concerned with differences influencing men due to scientific, philo-

sophical, or theological points of view. I am dealing only with how two

historians, who agree in every other regard,may nevertheless have different

opinions, for instance, as to the relevance of the factors which brought

about the French Revolution.The same unanimity will not be attained in

the field of human action as there will be, for instance, with respect to the

atomic weight of a certain metal.And with regard to the understanding of

the future operations of an entrepreneur or a politician, only later events

will prove whether certain prognostications based on their evaluations

were, or were not, correct.

There are two functions involved in understanding: to establish the

values, the judgments of people, their aims, their goals; and to establish themethods which they use to attain their ends.The relevance of the various

factors and the way in which they influence results can only be matters of

value judgments. In a discussion of the Crusades, for instance, it would

appear that the principal causes were religious. But there were other causes.

For example,Venice profited by establishing her commercial supremacy. It

is the historian’s task to decide the relevance of the various factors involved

in a course of events.

The historical school of economics wanted to apply to economics thesame general rules that Comte aimed at in sociology.There were people

who recommended substituting something else for history—a science of

laws derived from experience in the same way physics acquires knowledge

in the laboratory. It was also held that the historical method was the only

method for dealing with problems in the field of human action.

In the late eighteenth century, some reformers wanted to revise the

existing system of laws.They pointed to the lack of success and shortcom-

ings of the existing system. They wanted government to substitute newcodes for old laws. They recommended reforms in conformity with

“natural law.” The idea developed that laws cannot be written, that they




originate in the nature of individuals. This theory was personified by

Britain’s Edmund Burke [1729–1797], who took the side of the colonies

and who later became a radical opponent of the French Revolution. In

Germany, the Prussian jurist Friedrich Karl von Savigny [1779–1861] was

the advocate of this mode of thinking.With reference to the soul of the

people, this group of reactionaries agreed with the school of Burke.This

program was executed to some extent, and sometimes very well, in many

European countries—Prussia, France, Austria, and finally in 1900 in the

German Reich. In time opposition developed to this desire to write new

laws.Yet these groups were the forerunners of the present-day world.

The school of the historical method says that if you want to study a

problem, you must study its history.There are no general laws. Historical

investigation is the study of the problem as it exists. One must first know

the facts.To study free trade or protection, you can only study the history

of its development. This is the opposite approach from that advocated

by Comte.

All this is not to disparage history.To say that history is not theory, nor

theory history, disparages neither history nor theory. It is only necessary to

point out the difference. If a historian studies a problem he discovers that

there are certain trends in history that prevailed in the past. But nothingcan be said as to the future.

Men are individuals and, therefore, unpredictable. Mathematical laws

of probability tell us nothing about any specific case. Nor does mass

psychology tell us anything but that crowds are made up of individuals.

They are not homogeneous masses. As a result of the study of masses of

people and crowds it has been learned that a small change can bring about

important and far-reaching results. For example, if someone yells “Fire!” in

a crowded hall, the results are different from what they would have beenin a small group.Also in a crowd, the prestige of the police and the threat

of the penal code and of the penal courts are less powerful. But if we can’t

deal with individuals, we can’t deal with masses.

If a historian establishes that a trend existed, it doesn’t mean that the

trend is good or bad. The establishment of a trend and its evaluation are

two different things. Some historians have said that what is in agreement

with the trends of evolution is “good,” even moral. But the fact that there

is an evolutionary trend today in the United States toward more divorcesthan formerly, or the fact that there is a trend toward increased literacy, for

instance, doesn’t make either trend “good,” just because it is evolutionary.

12




PE O P L E G E N E R A L LY B E L I E V E that economics is of interest only to

businessmen, bankers, and the like and that there is a separate economics

for every group, segment of society, or country.As economics is the latest

science to have been developed, it is no wonder that there are many erro-

neous ideas about the meaning and content of this branch of knowledge.It would take hours to point out how common misunderstandings

developed, which writers were responsible, and how political conditions

contributed. It is more important to enumerate the misunderstandings and

discuss the consequences of their acceptance by the public.

This first misunderstanding is the belief that economics does not deal

with the way men really live and act, but with a specter created by

economics, a phantom that has no counterpart in real life.The criticism is

made that real man is different from the specter of the “economic man.”Once this first misunderstanding is removed, a second misunder-

standing arises—the belief that economics supposes that people are driven

by one ambition and intention only—to improve their material conditions

and their own we l l - b e i n g . C ritics of this belief say that not all men

are egoistic.

A third misunderstanding is that economics assumes all men to be

reasonable, rational, and guided by reason only, while in fact, the critics

maintain, people may be guided by “irrational” forces.These three misunderstandings are based on entirely false assumptions.

Economics does not suppose that economic man is different from what

13

Acting Manand Economics

3 R D L E C T U R E



man is in everyday life. The only supposition of economics is that there are

conditions in the world with regard to which man is not neutral, and that he wants

to change the situation by purposeful action. So far as man is neutral, indifferent,

content, he takes no action, he does not act. But when a man distinguishes

between states of various affairs and sees an opportunity to improve

conditions from his point of view, he acts.

Action is the search for improvement of conditions from the point of

view of the personal value judgments of the individual concerned. This

does not mean improvement from a metaphysical view, nor from God’s

point of view. Man’s aim is to substitute what he considers a better state of

affairs for a less satisfactory one. He strives for the substitution of a more

satisfactory state of affairs in place of a less satisfactory state of affairs.Andin the satisfaction of this desire, he becomes happier than he was before.

This implies nothing with reference to the content of the action, nor

whether he acts for egoistic or altruistic reasons.

To eliminate the misunderstanding that arises when a distinction is

attempted between “rationalism” and” irrationalism,” it must be realized

that what man does consciously is done under the influence of some force

or power which we call reason. Any action aimed at a definite goal is in

this sense “ r a t i o n a l .” The popular distinction between “ r a t i o n a l ” and“ i rr a t i o n a l ” is entirely without meaning. Examples of “ i rr a t i o n a l i s m ” c i t e d

are patriotism or the purchase of a new coat or a symphony ticket when

something else might have appeared a more sensible action.The theoret-

ical science of human action presupposes only one thing—that there is

action, i.e., the conscious striving of individuals to remove uneasiness

and to substitute a more satisfactory state of affairs for one that is less

satisfactory. No judgment of value is made as to the reason or content of

the action. Economics is neutral. Economics deals with the results of value judgments, but economics itself is neutral.

Nor is there any sense in trying to distinguish between “economic”

and “non-economic” actions. Some actions deal with the preservation of

man’s own vital senses and necessities—food, shelter, and so on. Others are

considered to be driven by “higher” motivations. But the value placed on

these various goals vary from man to man, and differ for the same man

from time to time. Economics deals merely with the action; it is the task

of history to describe the differences in goals.

Our knowledge of economic laws is derived from reason and cannot

be learned from historical experience because historical experience is

always complex and cannot be studied as in a laboratory experiment. The

14




15

source of economic facts is man’s own reason, i.e., which we call in epistemology

a pri o ri k n ow l e d g e, what one knows alre a d y ; a pri o ri k n owledge is

distinguished from a posteriori knowledge, knowledge which is derived

from experience.

Regarding a priori knowledge, the English philosopher John Locke

[1632–1704] developed the theory that the human mind is born a blank

slate on which experience writes. He said there was no such thing as

inherent k n ow l e d g e. G o t t f ried Wilhelm von Leibniz [1646– 1 7 1 6 ] , a

G e rman philosopher and mathematician, made an exception in the case of

the intellect itself. According to Leibniz, experience does not write on

empty white pages in the human mind; there is a mental apparatus present

in the human mind, a mental apparatus that does not exist in the minds of animals, which makes it possible for men to convert experience into

human knowledge.

I am not going to enter into the argument between “rationalism”

and “empiricism,” the distinction between experience and knowledge,

which the British philosopher and economist John Stuart Mill

[1806–1873] called a prioristic knowledge. However, even Mill and the

American pragmatists believed that a prioristic knowledge comes in some

way from experience.The way in which economic knowledge, economic theory, and so on

relate to economic history and everyday life is the same as the relation of

logic and mathematics to our grasp of the natural sciences.Therefore, we

can eliminate this anti-egoism and accept the fact that the teachings of

economic theory are derived from reason. Logic and mathematics are

derived in a similar way from reason; there is no such thing as experiment

and laboratory research in the field of mathematics. According to one

mathematician, the only equipment a mathematician needs is a pencil, apiece of paper, and a wastebasket—his tools are mental.

But, we may ask, how is it possible for mathematics, which is some-

thing developed purely from the human mind without reference to the

external world and reality, to be used for a grasp of the physical universe

that exists and operates outside of our mind? Answers to this question have

been offered by the French mathematician Henri Poincaré [1854–1912]

and physicist Albert Einstein [1879–1955]. Economists can ask the same

question about economics. How is it possible that something developed

exclusively from our own reason, from our own mind, while sitting in an

armchair, can be used for a grasp of what is taking place on the market and

in the world?

A C T I N G M A N A N D E C O N O M I C S



The activities of every individual—all actions—stem from reason, the

same source from which come our theories. Man’s actions on the market,

in the government, at work, at leisure, in buying and selling, are all guided

by reason,guided by choice between what a person prefers as against what

he does not prefer. Reason is the method by which a solution (whether

good or bad) is reached. Every action can be called an exchange insofar as it

means substituting one state of affairs for another. Hopefully the actor is substi-

tuting a situation he prefers for one which he likes less.

The starting points for the natural sciences are the various facts

established by experiment. From these facts, theories are built to more and

more abstractions, to more and more generalities. Final theories are so

abstract that they are practically inaccessible to the general multitude.Thatdoesn’t make them less valuable; it is enough that they are accessible to the

few scientists.

In an a prioristic science, we start with a general supposition— action i s

taken to substitute one state of affairs for another .This theory—meaningless to

many—leads to other ideas that become more and more understandable

and less abstract.

Natural sciences progress from the less general to the more general;

economics proceeds in the opposite direction. Natural sciences are in aposition to establish constant relations of magnitude. In the field of human

action, no such constant relations prevail, so there is no opportunity for

measurement. The value judgments which spur men to act, which lead

to prices and market activity, do not measure; they establish distinctions

of degree; they grade.They do not say “A” is equal to, or is more or less

than “B.”They say,“I prefer A to B.” They don’t establish judgments.This

has been misunderstood for 2000 years. Even today there are many

persons, even eminent philosophers, who misunderstand this completely.It is from the system of values and pre f e rences that the price system of

the market arises.

Aristotle wrote, among other things, about the various attributes of

men and women. He was often mistaken. Had he asked Mrs. Aristotle

about women, he would have found he was mistaken in some respects; he

would have learned differently. He was also mistaken in stating that if two

things were to be exchanged on the market, they must have something in

common, that they were being exchanged because they were equal. Now

if they were equal, why was it necessary to exchange them? If you have a

dime and I have a dime, we don’t exchange them because they are the

16




17

same. It follows, therefore, that if there is an exchange, there must be some

inequality in the items being traded, not equality.

Karl Marx [1818–1883] based his theory of value on this fallacy. In

Capital and Interest, by Eugen von Böhm-Bawerk [1851–1914], see

Chapter XII dealing with Marx (“The Exploitation Theory” in Volume I,

History and Critique of Interest Theories). Long after Marx, Henri Bergson, in

a much-admired book about the two sources of morals in religion,

accepted the same fallacy—if two things are exchanged on the market they

must be equal in some way. But things that are “equal” are not exchanged;

exchanges take place only because things are unequal .You take the trouble

of going to the market because you value the loaf of bread more highly

than the money you give for it. People exchange things because at thattime they prefer other things to money. An exchange never occurs with

the intention of a loss.The acting man is never pessimistic because his action

is inspired by the idea that conditions can be improved.

The aim of action is to substitute a state of affairs better suiting the

men taking the action than the previous situation.The value of any change

in their situation is called a “gain” if it is positive, a “loss” if it is negative.

This value is purely psychic, it cannot be measured.You can say only that

it is greater or less. It becomes measurable only insofar as things areexchanged on the market against money. As far as the action itself is

concerned, it has no mathematical value.

But, you say, this contradicts our daily experience. Yes, because our

social environment makes calculations possible insofar as things are

exchanged for a common medium of exchange, money.When things are

exchanged against money, it is possible to use monetary terms for

economic calculations, but only when three conditions are filled:

1. There must be private ownership, not only of the products, but alsoof the means of production;

2. There must be division of labor and, therefore, production for the

needs of others;

3. There must be indirect exchange in the terms of a common

denominator.

By and large, given these three conditions some mathematical values

may be established, although not precisely. These measurements are not

exact because they deal with what took place yesterday, historically.

Business financial statements may look precise, but even the money value

of an inventory entered at “so many dollars” is a speculative value of future




anticipations; the value credited to equipment and other assets also is

speculative.The real problem of inflation is that it falsifies these calculations

and brings about tragic problems.

M o n e t a ry calculations do not necessarily exist in all kinds of

organizations or societies.They did not exist when economics began.The

earliest humans acted; humans have always acted; but it was thousands of

ye a rs before the evolution of the division of labor and of a financial

apparatus made monetary calculations possible. Monetary calculations

developed step by step during the Middle Ages. In their early development

they lacked many features we think of today as necessary. (In a socialist

system, these conditions would again disappear and make such calculations

and measurements impossible.)The quantitative nature of the natural sciences enables mechanics to

make plans and build bridges. If you know what must be built, technology

based on the knowledge of the natural sciences is sufficient.The questions

a re, h oweve r: What should be constructed? What should be done?

Technologists cannot answer these questions.

In life the materials of production are scarce. No matter what we do

there will always be other projects for which the necessary factors of

production cannot be spared.There will always be other urgent demands.This is the factor that businessmen take into account in calculating loss and

success.When a businessman decides against a certain project because the

cost is too high, it means the public is not prepared to pay the price to use

raw materials in that manner. Use is made of the available factors of

production for the realization of the greatest number of those projects that

satisfy the most urgent needs without wasting factors of production by

withdrawing them from more urgent to less urgent employment.

To establish this it is necessary to be in a position to compare theoutlays of various factors of production. For example, let it be assumed that

it is necessary to build a railroad between two towns—A and B. Let u s

assume that there is a mountain between A and B. T h e re are thre e

possibilities—to go over, through, or around the mountain. A common

denominator is necessary to calculate the comparative value. But this can

give only a picture of the monetary situation; it is not a measurement. It is

an evaluation in the light of present-day needs and situations. Tomorrow

conditions will be different.The success or failure of every business project

depends upon its success in anticipating future possibilities.

The problem with trying to develop a quantitative science of

economics is that many persons imagine that theoretical economics must

18




19

follow the evolution of other branches of science. The natural sciences

developed from being qualitative to being quantitative in nature and

many people are inclined to believe that the same trend must take

place in economics also. However, there are no constant relationships in

economics, so no measurement is possible.And without measurement, the

quantitative development of economics cannot take place. Quantitative

facts in economics belong to economic history—not to economic theory.

A book titled Measurement of the Elasticity of Demand was reviewed

recently by a man now in the U. S.Senate,Paul Douglas [1892–1976],who

may even be hoping for higher political office sometime. Douglas said

economics should become an exact science with fixed values like atomic

weights in chemistry. But this book itself does not refer to fixed values; itrefers to the economic history of one definite period of time in one partic-

ular country, the United States. The results would have been different if

another period of time or if another country had been considered.Within

the framework of the universe in which we operate, atomic weights do not

change from one period of time or from one country to another. On the

other hand, economic values and economic quantities do change from

time to time and from place to place.

Economics is the theory of human action. It is a historical fa c t of great importance, for example, that the usefulness of the potato was

discovered by the natives of Mexico, brought to Europe by a British

gentleman, and that its use spread all over the world.This historical fact has

had important effects on Ireland, for instance, but from the point of view

of economic theory it was just an accident.

When you introduce figures into economics you are no longer in the

field of economic theory, but in the field of economic history. Economic

history is also, of course, a very important field. Statistics in the field of human action is a method of historical study. Statistics give a description

of a fact, but they cannot prove any more than that fact. (It is true that some

statisticians are “swindlers” and, as a matter of fact, some statisticians in the

government were probably appointed merely for that purpose.)

Some people may misinterpret these statements and conclude that the

purpose of economics, being a purely a prioristic science, is to develop a

program for a future science, and that economics is a theory practiced only

by “armchair gentlemen.” Both these statements are wrong. Economics is

not a program for a science that doesn’t yet exist. And it is not a science

merely for purists.Therefore, we must reject the ideas of some people that

one must learn history to study human action. History is important. But




you cannot deal with present-day conditions by studying the past.

Conditions change.

As an example of what I mean. The National Bureau of Economic

Research published a report on the subject of installment selling which

appeared on the eve of World War II, on the eve of inflation, and on the

eve of government credit restrictions.At the moment when the study was

made, it was already “dead”; it dealt with matters that were already past.

I don’t mean to say that it was useless.With good brains one can learn a

lot from it. But don’t forget it is not economics—it is economic history.

What they were really studying was the economic history of the most

recent past.

Darwin realized this too. He saw that in studying animals, the animalwas killed at the moment when it was dissected for study, so that one could

never actually study the animal—one can never study life itself.

The same is true of economics. One cannot describe the present

economic system—one can only describe the past. One cannot predict

about the future as a result of studying the past. Very often economic

historians teach history under the label of “economics.” Even though you

know everything about the past, you know nothing about the future.

20




TODAY I WILL DEAL WITH SOME OF THE ASPECTS of the theories of Karl

Marx. I want to contribute a little bit to the materialistic interpretation of

history. First of all, I must say something about the general philosophy and

history of Marx.

In general, philosophical doctrines concerning historical problems aredoctrines of a very special type. They try to point out not only what

history was in the past but they presume to know what the future has in

store for mankind and to offer a solution for future problems. Most

philosophers reject this method of thinking. For example, Immanuel Kant

[1724–1804] declared that a man who tried to do this would be allocating

to himself the ability to see things with the eyes of God.

Nevertheless, in the 1820s Hegel gave such a philosophical interpreta-

tion of history. According to Hegel, the driving force of the IndustrialRevolution was an entity called Geist, i.e., spirit or mind. Geist has certain

aims which it wants to fulfill. The evolution of the Geist of history has

now reached its final goal. This final goal, according to Hegel, was the

establishment of the kingdom of Prussia of Friedrich Wilhelm III

[1770–1840], and of the Prussian Union Church. Critics of this doctrine

say this would mean there would be no history in the future because

evolution had reached its final end.

In the middle of the nineteenth century, Karl Marx, on his own,developed a philosophy different from that of Hegel.The driving force of

Karl Marx was not Geist or spirit but something called the “material

21

Marxism, Socialism, andPseudo-Science

4 T H L E C T U R E



productive forces.” These forces push the history of mankind through

various successive stages, the next to the last of which is capitalism.After

capitalism comes inexorably the last stage—socialism.Therefore, according

to this theory, the coming of socialism is inevitable, determined by the

forces of history.

The predecessors of Marx, the historic socialists,believed that to realize

socialism it was necessary to convince the majority of the people that

socialism was the better, or the best system; then the people themselves

would bring about the substitution. Karl Marx said nothing about the

desirability of socialism; he pretended not to be speaking in favor of

s o c i a l i s m . He claimed to have discove red a law of social evolution

indicating that socialism was bound to come with the inexorability of alaw of nature.

But is socialism better? This question had already been answered by

Hegel and Comte.According to their doctrines, it was tacitly assumed that

each successive stage of evolution must of necessity be “better” and

“higher” than the previous stages. Therefore, to raise the question of

whether or not a later evolutionary stage is better is beyond the point. It

was obvious. Because socialism would be a later stage, it must of necessity

be better.Marx believed that socialism was just around the corner.After that, all

history would come to an end.After that there could be no further devel-

opment because once the class conflict was eliminated we would be living

in a state in which no longer anything important could happen. Here is a

quotation illustrating that point from Friedrich Engels [1820–1895], who

considered himself not only a great economist but also a great expert on

military problems:

In the first place the weapons used have reached such a stage of

perfection that further progress which would have any revolution-

izing influence is no longer possible. . . . The era of evolution is

therefore, in essentials, closed in this direction.1

Since then, today’s modern weapons have all been developed.

22


1 [Herr Eugen Dühring’s Revolution in Science (Anti-Dühring) [1878] by Friedrich Engels(New York: International Publishers, 1939), p. 188.]



23

The most important problem for the doctrine of the inevitability

of socialism to explain is how a superhuman entity such as Geist or the

“material productive forces” can force individuals to act so that a certain

irresistible result must prevail. People have their own individual plans—

t h ey aim at va rious ends. But the inevitability-of-socialism theory

maintains that whatever people do they must finally produce the results

which Geist or the “material productive forces” wanted to have produced.

Two explanations have been suggested.

One group had a very simple solution. This group maintained that

people will be forced by “Führers” or supermen to go the way that Geist

or the material productive forces indicate. There have always been kings

and dictators who have assigned to themselves this superhuman mission.So Stalins, H i t l e rs , and Mussolinis are elected by history ; those who

don’t obey their commands must be liquidated because they are against

“historical evolution.”

This was not Marx’s idea. The Marxian doctrine was based on the

much-discussed “economic dialectic historical materialism.” Materialism is

one of the ways in which people try to solve one of the most fundamental

and insoluble problems, the relation between the functions of the

individual’s soul or mind, on the one hand, and the functions of the body,on the other. Precisely what this relation is remains controversial.There

is no doubt that there is some connection, and many attempts have been

made to explain it. However, our only interest in such a materialistic

explanation at the moment is because of its relation to Karl Marx’s theory.

The materialistic philosopher says that all mental functions of men are

simply produced by their bodily organs—by their physical brains. Some

eighteenth-century philosophers suggested this idea. In the nineteenth

century it was expressed more crudely by some of Marx’s contemporaries,among them the German philosopher Ludwig A n d reas Fe u e r b a c h

[1804–1870], who said bluntly, “Man is what he eats.”This is interesting,

but somewhat difficult to accept.Chemically, the secretion of the organs of

all normal men is the same. Insofar as they are not, insofar as there are

irregularities, these variations indicate a pathological condition and these

irregularities are the same for all men in the same pathological condition.

Ideas and thoughts, however, are different. Two boys may take the same

exam, but their answers to the same questions will be different.The Italian

poet Dante wrote beautiful words,while others may have difficulty writing

anything at all.Therefore, there is something “fishy” about this doctrine.

Marx rejected this type of materialism, saying these materialistic

M A R X I S M , S O C I A L I S M , A N D P S E U D O - S C I E NC E



philosophers were weak in dealing with social problems. In spite of the fact

that superficial knowledge of Marx’s own brand of materialism requires

very little time, it is not very well known. His particular brand of

materialism is expressed on a very few pages of his Critique of Political

Economy, the original draft for the first chapter of Das Kapital :

In the social production of their subsistence men enter into

d e t e rmined and necessary relations with each other which

a re independent of their wills—p ro d u c t i o n - relations which

c o rrespond to a definite stage of development of their materi a l

p ro d u c t ive forc e s .2

The material productive forces produce, independently of the will

of the people, definite legal and institutional systems called “production-

relations.” Production-relations are the necessary consequences of the

material productive forces.

Over and above the production-relations there is a super-structure

which includes everything ideological—art, literature, science, religion,

and so on.These super-structures are the necessary products of the existing

production-relations.The production-relations are, in turn, the necessaryconsequences of the existing material productive forces, which are the real

thing. The material productive forces alone have an individual effect.

When the material productive forces change, they inevitably bring about,

independently of the will of man, corresponding changes in the produc-

tion-relations of the social organ, of society. They also bring about changes

in the super-structure.Therefore, the important question is:What are the

material productive forces?

Here we are faced with Marx’s peculiar technique of not givingdefinitions of the terms he uses. However, his occasional examples are

helpful. Most important is the example which appears in The Poverty of

Philosophy (1847). The hand mill gives you “feudal society”; the steam mill

gives you “industrial society.” This means that the material productive

forces are the tools and machines. It is the tools and machines that are the

real things.The tools and machines change; they have a history of their

own; they produce first of all the production-relations and the social

s t ru c t u re, and above the social stru c t u re they produce the super-

24


2 [C a p i t a l , the Communist Manife sto and other W ri t i n g s by Karl Marx, edited with anintroduction by Max Eastman (New York:The Modern Library, 1932), p. 10.]



25

structure—the literature, religion, and so forth. Other instances lead us to

the same conclusions, that what Marx meant by the “material productive

forces” were the tools and machines.

But two important questions arise.Tools and machines do not appear

in the universe independent of the human mind. They are products of

human thought and ideas—they are products of the human mind.

Secondly, these tools and machines can only be introduced into practice

when the social conditions make it possible—there must first be a certain

degree of division of labor in order to apply and to use machines.Without

the division of labor, machinery, the product of ideas is useless. Is this really

materialism? Thus the evolution of Marx’s ideological factors—the source

of ideas, the basic material productive forces—is traced back to productswhich are themselves the result of the human mind.Therefore, the whole

scheme is unsatisfactory.

Marx wanted to show how new ideas originated. He attacked the

theories of the eighteenth century, especially those of Scottish historian

and philosopher David Hume [1711–1776], that ideas that are the impor-

tant thing,that changing ideas result in changing conditions.Marx said that

ideas are nothing but the necessary outcomes of material fa c t o rs ,

products of the material productive forces. But we see that the materialproductive forces are themselves the products of ideas. Marx’s thinking

moves in a circle.

There were others besides Marx who attached enormous importance

to inventions and improvements in machines. A little later in the 1870s,

Leopold von Ranke [1795–1886] declared that the history of technology

is the most important aspect of human history; everything is continued

by technology. Marx went farther in saying that everything really and

literally depends on changes in technology. But he couldn’t explaineverything from the materialistic point of view because tools and machines

are themselves products of the human soul.

When Marx died, his friend and collaborator, Friedrich Engels,

addressed his friends at the grave. In this speech he tried to condense into

a short statement what he considered the great immortal ideas of Marx.

This speech contains a slightly new interpretation of Karl Marx. Engels

declared that “Like Darwin, who discovered the law of evolution of

organic nature, Marx discovered the law of mankind’s historical evolution,

i.e., the simple fact, hitherto hidden beneath ideological overgrowths, that

men must first of all eat, drink, have shelter and clothing before they can

pursue politics, science, art, religion and the like. . . .” This, said Engels,




had been unknown before Marx discovered it. But it is obvious; nobody

has ever denied it. As a matter of fact, there is an old Latin dictum or

saying of the early Middle Ages: “First you must live, then you can be

a philosopher.”

It was a wonderful trick of Engels to give this interpretation to Marx

because since then, whenever anyone tries to contradict Marx’s theory, he

is asked whether he denies that one must first eat and drink before one can

write. It is obvious that one must. So you are forced to accept the basis of

the Marxian theory.

Marx continues. Society is divided into classes and every member

of a class is bound by the laws of history to think according to his class

interests.The class allegiance, not only in the present state of society butalso in preceding stages when the classes developed, determines the

content of a person’s ideas.A person thinks in a certain way because he is

a member of a definite class.And as all class members think according to

their own class interest, the result is that the interests of those classes which

history has selected must finally triumph. Marx’s idea is that the class, not

the individual, thinks.

Classes do not create themselves. We make classes by classifying. If a

classification is correct and logical, then the classification cannot beattacked. Marx classified people and assumed that there existed an

irreconcilable conflict of interests among the several classes.The question

is, does such a conflict exist? Marx never proved this. He first presented the

theory of classes in the Communist Manifesto of 1848. Later he published

lots of other books. But he never told us what a “class” was; he only

explained what classes were not.

In one of the volumes of Das Kapital, published by Engels after Marx’s

death, there is a chapter titled “Classes.” Here Marx starts out by tellingwhat classes are not.Then the manuscript ends.A note by Engels says the

work was never finished. We could feel very sad if we did not know that

Marx’s writing was not interrupted by his death; he stopped writing these

volumes many years before.

Marx gives examples of class conflict, but they all refer to conditions

of status in a caste society, when one is born into a certain caste—nobility,

bourgeoisie, serfdom, and so on. Under such circumstances, there is a

conflict of interests.Anyone born a member of a definite caste has only as

much right and privilege as his father. And then it is correct to say that

there are class conflicts. But a society in which there is equality under law

26








29

labor legislation, calling them frauds to exploit the laboring classes even

more than before.

No social formation ever disappears before all the pro d u c t ive

f o rces are developed for which it has ro o m , and new higher

relations of production never appear before the material

conditions of their existence are matured in the womb of the

old society.4

Therefore, it was Marx’s thesis that in order to accelerate the coming

of socialism,capitalism must first reach maturity. (This is comparable to the

“mature capitalism” of the New Deal.) All these methods to “improve”capitalism such as social security, labor legislation, and so forth, are just

petty bourgeois policies; they are detrimental to the interests of the

workers because they only postpone the maturity of capitalism.

If it is true that the coming of socialism—a blessing for the workers—

is independent of the will of men, if it depends exclusively on the matu-

rity of capitalism and the development of the productive forces within

capitalism, what is the use of a Socialist Party? Isn’t it preposterous,

according to this theory, for man, who has nothing to say as to the future,to attempt to reach a goal? The answer made to that question is that, just

as a midwife is necessary to aid a mother give birth, so is the Socialist Party

necessary to bring socialism into the world. Sometimes the midwife may

interfere and the situation changes, but she serves a purpose.

Thus we see that Marx’s attempt to show that ideas are the products

of something material was not too conclusive. He demonstrated only that

ideas are produced by forces which are themselves already the products of

other ideas. All his theories teach is that among ideas some are moreimportant than others. According to him, the idea that brings about the

construction of a new machine, for instance, is more important than the

ideas that bring about a poem or a philosophical system.The value of all

these mental activities is attacked by Marx.What is the use of poetry, the

value of religion, if these are merely consequences of the fact that we have

certain tools of production? I wouldn’t even call this theory of Marx’s

“materialism.”

In the 1840s and the 1850s, recognized sociologists and economists


4 [Marx, op. cit., p. 11.]



devastated the teachings of the socialist authors with their criticism. But

their critiques did not touch the most important problems.There was no

reason for them to do so because they abolished the assertions of their

socialistic contemporaries. Karl Marx realized that he couldn’t answer

these critiques, and his socialistic doctrines took another turn. First of all

he elaborated the theory that everybody is bound by the laws of nature to

think in such a way as the interests of his class force him to think. He

believed that a man’s theory, no matter with what it deals—whether

religion, philosophy, or law—can never give us truth so long as there

are classes. Class ideologies, he felt, are obviously false because of their

deficiencies and biased to serve the interests of the author. Marxians, even

today, believe that they have proved their thesis simply by asserting thatthere is no such thing as an unbiased search for truth, that man doesn’t

search for truth but only for practical results.

For the sake of the argument, if we accept the thesis that all mental

activities are motivated by the desire for practical results, we must admit

that if a man wanted results, he would aim at a theory which was correct.

Pragmatists say “truth” is something that works when applied. Ludwig

Boltzmann [1844–1906], a positivist philosopher, said that the proof that

our physical theories are correct rests on the fact that machines constructedaccording to these theories operate as expected. Because people wanted to

kill one another by firearms they developed the theory of ballistics.

According to Marx, the theory of ballistics was not developed because

people wanted to kill other people, but the theories are correct because

they wanted to kill. Marx developed his theory because he wanted to say

that the proletarians needn’t worry about the bourgeois point of view;

what the bourgeois economists said about socialism was of no concern to

the workers.The second point he developed was the theory of the inevitability of

the coming of socialism because of the progressive impoverishment of

the workers by the capitalists. As socialism is a later stage, Marx said, it is

necessarily also a higher stage. It is, therefore, beside the point to develop

plans for the future socialistic state. Critics have demolished these ideas

saying they cannot work. But Marx said that we do not have to do it; the

productive forces will make the plans when everything is ripe.

Marx’s success was enormous. Today, many people who believe that

socialism is inevitable consider themselves young Marxists and young

Communists. There has been resistance to his historical materialism,

but there has been little resistance to the theory of the inevitability

of socialism.

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31

The main deficiency of the present-day mentality is precisely the

fact that people are rather weak in criticizing the fundamental thesis

of Marxism. A book by Alexander Miller on The Christian Significance

of Karl Marx (New York: Macmillan, 1947) recommends the use of

the Christian re l i gion to endorse not only Marxism itself but also

Marxian materialism.

Marx was consistent in rejecting attempts at labor legislation. His

theory was that the world must follow a certain sequence of events:

(1) feudalism; (2) capitalism; and (3) socialism.Because it was incompatible

with his theory, he rejected the theory that one stage could be skipped

over. However, when Marx died, Engels found among his belongings a

note by Marx on a scrap of paper suggesting that this might be possible.Evidently Marx had scribbled this note one night—in the morning he had

thought better of it, realizing that if he agreed to this it would destroy his

basic theory. Engels copied the note in his own handwriting and sent it to

a woman in Russia who had won some fame because she had killed the

police commissar and had been acquitted—such things happened in

Russia then. She published it in the 1880s.The Bolsheviks thought this was

a wonderful idea—they knew Russia was backward and seized upon this

as grounds for believing they wouldn’t have to go through capitalismbefore attaining socialism, but could skip over that stage.

The importance of Marx is that he branded the doctrines of other

humanists as ideologies, false theories which precisely on account of

their incorrectness are useful to the class from which they emanate.As an

economist Marx was completely dominated by the doctrines of the British

classical economists. They developed the important system of political

economy, but they failed to solve one fundamental problem—the paradox

of value. Their theory seems obvious—people value external things andservices because of their utility, because these things can bring about

certain useful services—the more useful the service, the greater the value.

But they couldn’t explain why one unit weight of gold,which is less useful

than iron, is exchanged against a number of such units of iron.

In 1870, the solution to this paradox was discovered independently

three different times by three different persons—William Stanley Jevons

[1835–1882] in England, Carl Menger [1840–1921] in Austria-Hungary,

and Léon Walras [1834–1910] in Switzerland.These three men recognized

that only a definite limited quantity of something is traded in any partic-

ular exchange. People don’t exchange the total available supply, for

instance,of iron or gold. If a man gives several units of iron for one of gold,






I WANT TO START TONIGHT WITH THE RELATION between economics and

human practical life, and the consequences of the development of the

theory of economics.

Kipling said, “East is East, and West is West, and never the twain shall

meet.”Differences between the East and the West have certainly existed for

thousands of years. The East never developed the idea of scientific

research—the search for knowledge and truth for its own sake—which

the Greeks gave to civilization. A second achievement of the Greeks,

which has always been foreign to the East, is the idea of political liberty of

government—of political responsibility of the individual citizen. These

ideas, widely accepted in the West, never found counterparts in the East.

Even today, only a small group of Eastern intellectuals follow these ideas.

Nevertheless, the world was more or less one world, in spite of these ideas,until about 250 years ago.

Social relations and living conditions were more or less the same all

over the world until 250 years ago.The average standard of living varied

little between East and We s t . M o d e rn methods of production and

standards of consumption, technological knowledge, and equality under

the law were unknown.Today we would consider most unsatisfactory the

conditions that prevailed then. Aside from its political meaning, Wendell

Willkie’s word,“One World,” was more applicable then than now.The general improvement in political tranquility, which had reached a

certain degree about 250 years ago, contributed to an increase in popula-

33

Capitalism and HumanProgress

5 T H L E C T U R E



tion. This additional population was too much for the social system of

those ages.The countries where political conditions were most favorable

became infested with robbers, thieves, and murderers—people for whom

there was no place under the existing economic situation.

Then something occurred in Europe—first in western Europe, Great

Britain, and the Netherlands—which spread over the rest of the Western

world. It was this movement that led to considerable differences between

the East and the West.This movement is called by historians the Industrial

Revolution. Radical changes were brought about by preceding radical

intellectual changes, that is, by the intellectual movement that produced

economics as an autonomous branch of human knowledge.These radical

changes multiplied population figures and changed the face of the world.

Some of these ideas had been developing during earlier generations.

For instance, G re s h a m ’s law, the “ l aw ” of Sir Thomas Gre s h a m

[1519?–1579] which points out that a legally overvalued (bad) money ends

up d riving a legally undervalued (good) money out of circ u l a t i o n . This

regularity in the field of money had been noted earlier by the Greek comic

dramatist Aristophanes [448?–?380 B.C.] in The Frogs and by the French

bishop Nicolas Oresme [1320?–1382]. H oweve r, t h e re had been no

realization that similar regularity existed also in relation to the concatena-tion and sequence of phenomena in the marketplace. The recognition

of regularity in the broader field of market activities was an achievement

of the human mind, a mental accomplishment. As a result of this new

knowledge of regularity in the marketplace, people began to look on all

productive activities from a different viewpoint.

The question has been raised as to why the ancient Greeks, for

example, whose knowledge of science was so far advanced, did not

make practical use of their discoveries. It has been said that they had thescientific knowledge to develop railroads, but they didn’t. Why not?

Their progress was handicapped by certain ideas. One idea that held them

back, an idea which still prevails today, is that of “technological unemploy-

ment,” the idea that improved methods of production lead to unemploy-

ment. Because of this, it was considered a crime to deviate from traditional

methods of production, no matter how unsatisfactory the old methods

were.The idea did not occur to them that reducing the amount of labor

re q u i red for the production of a certain amount of goods or items would make possible the freeing up of materials and labor for the

production of other items.

34




35

The second idea that handicapped the Greeks’ development was that

they looked on a business deal as one-sided—the seller profits, the buyer

loses. This attitude was especially important in its effect on international

trade. This old superstition that foreign trade will create unemployment

still prevails today. Many people still believe that the advantage to be

derived from foreign trade comes from exporting, not from importing.

If this were the case, it would mean that the advantage to be derived

from buying a loaf of bread would come from “exporting” the money,

from spending the money to obtain the bread, and not from getting the

bread itself.

Because it was considered a crime to depart from traditional methods

of production and trade—and any changes are necessarily always innova-

tions—we are apt to ignore another development, a new idea heretofore

unknown.We are blind to the great changes that took place, not only in

production, but also in consumption.We see the mass production, but fail

to see that this mass production was produced for the satisfaction of the

needs of the masses.The guilds and handicraftsmen of the Middle Ages had

produced for the well-to-do. Before the Industrial Revolution, and in the

early days of the Industrial Revolution, there was a great trade in second-

hand clothing. Clothes that were made to order for the well-to-do werebought secondhand by the poor.This trade in secondhand clothing, a really

important part of the economy, disappeared as a result of the development

of modern methods of production.

The Industrial Revolution started by producing for the needs of

the poor, of the masses. Mass production started by producing the

cheapest and the poorest things.The cotton industry was one of the early

developments of the Industrial Revolution. Cotton was a poor man’s

material—no member of the upper or middle classes wanted cotton.Thequality of mass production improved only when the conditions of the

masses improved to the extent that they also became biased against cheap

products. Not so long ago no lady or gentlemen would have bought

factory-made shoes, or ready-made clothes.Not until 100 or 120 years ag o

could one even buy a ready-made shirt in Germ a ny. All these

industries have developed during the last 100 to 150 years.

As a consequence of the Industrial Revolution in the We s t , an

enormous gulf developed, a gulf which today separates the West from theEast.The East still clings to the idea that once hindered the development

of capital in the Western world, the idea that one man’s wealth is the cause

C A P I T A L I S M A N D H U M A N P R O G R E S S



of the poverty of others.The concept of the “underdeveloped nations” has

arisen and the idea that it is necessary to give them technological advice,

i.e., “know-how.” This is really ridiculous! There are lots of Indians,

Chinese, and students from other countries in our universities who are

very capable persons and who are acquiring know-how. And even if they

weren’t, many Americans would be willing to go to those countries to

work and to give advice. What they really need is the capital. What is

lacking is capitalism.

What is the use of economics, of theoretical economic discussions?

All the achievements of the physical and chemical sciences would have

remained a “dead letter,” without any significance for real life if the ideas

spread by the economists of the eighteenth century about the division of

labor, freedom of exchange, and so on, had not paved the way for the

practical application of those scientific discoveries. And yet some people

today still look askance at innovations. For instance, a German professor,

who was considered an eminent economic historian and was an honorary

member of many societies, said in one of his last books that it was a very

serious drawback that our social institutions permitted everyone the

opportunity of producing an invention to put it into practical use. He

believed that no harm could come from putting inventions in museums,but unless they were military inventions, that is where they should remain.

(This was the basis of the Führerprinzip —the idea that the all-knowing

Führer should give the orders and that the Führer receives his orders

directly from God, who is the Führer of the Universe.) Scientific advance

may be hindered to a certain extent but, by and large, it is impossible to

stop it completely.

Some people consider scientific progress “material.”To aim at nothing

but improvement of the material or external conditions of life—better food, clothing, homes, and so forth—they called “materialism.”They said

people who have such goals care only for the “mean” necessities of daily

life. On the other hand, they think they are ethical and that they display

idealism by disparaging such material improvements. But let us see.

One of the consequences of the Industrial Revolution was that the

world is now populated by many more people than could have been

supported before. Each individual in the capitalist countries also lives at a

much higher standard of living than before. This means that the averagelength of life is much longer.The growth in population was not achieved

by an increase in the birth rate, but by a decrease in the mortality rate,

36




37

especially of infants. Queen Anne of England, the last reigning member of

the Stuarts, had seventeen children, but not a single one lived to reach

adulthood.This situation had serious significance for England; it created

the historical and religious problem of the Protestant succession.As further

evidence of the extent of infant mortality, most of the charming children

in the Habsburg families that Velásquez painted died in childhood.You may

call the improvement of living standards brought about by the Industrial

Revolution “materialism.” But from the point of view of the parents,

the improved life expectancy of their children may not have seemed

merely materialistic.

Engels said people must eat before they can develop philosophical

ideas.With this I can agree.The Europeans are now claiming that they are

fighting the “Coca-Cola civilization,” but it would be a mistake to say that

capitalism has developed nothing but Coca-Cola. Capitalism has certainly

led to philosophical and theological improvements also. In the light of the

great scientific discoveries of the nineteenth and twentieth centuries, to say

that the capitalist economy is the “Coca-Cola civilization” would not seem

to be an “unbiased” statement.

S everal rights and liberties developed with the Industri a l

Revolution—policies of economic freedom both in domestic and foreigntrade, of sound money and of abstention from government interference.

These are policies, not scientific truths; they are policies based on value

judgments that arose because of knowledge that had been developed.We

must realize the relation between knowledge and values.

It is easier to grasp this distinction in the field of medicine or

chemistry. Scientists may establish the fact, for instance, that drug A is a

poison, but they do not issue a value judgment on the drug. Pathology

and chemistry do not say how a chemical should be used. Their task isaccomplished when they determine whether it will, or will not, prolong

human life.The decision whether or not to use the poison, and how, must

come from somewhere else, not from the chemist or pathologist; that

decision must come from a value judgment. If a doctor cannot save the life

of both mother and child, a dilemma results:Whose life should be saved?

The answer does not come from medical science; it must come from a

judgment of value.

In the field of social relations and human conduct, science provides uswith existential propositions, statements as to the consequences of certain

causes.There is a fundamental difference between such statements of fact




and the judgment of value which tells us what alternative is more

desirable, more preferable.A value judgment tells us what ought to be from

the point of view of those who share the same values.

It would appear that the importance of economics for daily life is

small. But that is not true.Actually economic theory is very important. In

order to take the proper steps to attain a specific goal, we must first be

familiar with the actual state of affairs—the existential situation. But then

we need economic know l e d g e, economic unders t a n d i n g , to make

decisions, to act, to make value judgments. To judge the importance of

economic knowledge, consider the case of Iran.When she confiscated the

property of the Anglo-Iranian Oil Company recently and nationalized the

oil industry, she wanted to improve the situation of her people.1 The

question is whether or not the policy she is following will have that effect.

The classical economists introduced the term “the rightly understood

interests.” There are various “runs” of different lengths of time.To deter-

mine “the rightly understood interests,” one must consider all possibilities

because the short-run end is often different from the long-run end. One

of the most popular attacks on economics is that economists take only the

long run, not the short run, into consideration. But that is not true.

Economists simply point out that there is a distinction between the two.One is apt to prefer short-run interests to interests in the long run, but

this doesn’t mean one must consider only the long run. Governments

seeking to remedy economic ills by various interventions may not destroy

the capitalistic countries in the short run. Some poisons act quickly, others

more slowly. Like a slow poison, government interventions may bring

about consequences in the long run which are disastrous, even from

the point of view of precisely those persons who wanted to resort to

these measures. John Maynard Keynes [1883–1946] said, “In the long run, we are all

dead.”This is my only point of agreement with Keynes. Even though this

idea is correct, it means no more than does the remark of Madame de

Pompadour, mistress to King Louis XV, whose role it was to console the

king when his armies were threatened—“There is no reason to worry.

38


1 [On April 30, 1951, the Iranian Parliament under Premier Mohammed Mossadeghenacted legislation, retroactive to March 20, 1951, expropriating the property of theAnglo-Iranian Oil Company and nationalizing the industry “[f]or the happiness andprosperity of the Iranian nation and for the purpose of securing world peace.”—Ed.]



39

‘Après nous le déluge,’” Fortunately for her, Madame de Pompadour died

early. But her successor as Louis XV’s mistress, Madame du Barry, was not

so fortunate—she survived the short run but lived to be executed in the

long run.

But Keynes’s ideas are unsatisfactory even from his point of view. His

credit expansion theories bring about an artificial boom which eventually

must turn into a depression and crisis. The unwanted consequences may

appear several times during one’s lifetime, not only after one’s death.A man

living today may have seen the depressions of 1907, 1921, 1929, 1937, and

he may live to see yet another.

Economics merely states that there are both short-run and long-run

consequences. One must consider both. Decisions should be made in the

light of all knowledge available. Economics doesn’t say, for instance, that

free trade is better than protection. Economics merely points out the

differences between the consequences of the two. Economics merely states

that protection is not a way to improve the general standard of living.

But this does not apply to cases in which a protective tariff is advocated

for other reasons. For example, when the United States realized the threat

to her supply lines on the eve of World War II, she could have introduced

an import duty on natural rubber and subsidized synthetic rubber manufacturers. But this would then have been considered a “defense”

expenditure, not a choice based on economics, and it would have been

judged from the point of view of defense.

What the economist provides is not judgments of value, which no

science may issue, but the information one needs to make value judgments

and decisions.The valuation, the judgment, rests with the individual, with

the people, and with the voters.

The idea of the neutrality of science has been criticized, especiallyby those who wish to elevate certain judgments of value to a higher

degree, to the dignity of a rule which everybody must obey. In Germany,

especially after the War of 1870, the German professors who taught

the economic aspects of political science considered it re gre t t a ble

that there should be tolerance, u n d e rs t a n d i n g , p e a c e, and good will

among the nations.

The idea of the neutrality of science (Wertfreiheit —freedom from

value) is the most characteristic development of science.Because economicscience is neutral, this does not mean that it doesn’t deal with practical

problems; it only means that it doesn’t explain the meaning of human




action. But it is precisely because of its neutrality that people with different

evaluations are able to live peaceably together. This is one of the most important

ideas that came out of the Industrial Revolution and the development of

modern science. It was an idea that was absolutely foreign to the most

eminent minds of the sixteenth century.Very few persons then could have

understood that people with different religions, values,and ideas, could live

together in the same city, the same country, or the same world.

The peaceful exchange of ideas and the peaceful coexistence of people

with various ideas were in triumphal progress at the beginning of the nine-

teenth century.There was then a development toward freedom and peace,

especially toward intellectual freedom for ideas, toward the elimination of

government cruelty in punishment and of government torture in criminal

procedure, and also toward an improvement in the standard of living.

People came to believe that this development toward freedom and peace

was inevitable. In the nineteenth century they were fully convinced that

nothing could stop this trend toward more freedom. The Manchester

Chamber of Commerce in Great Britain even declared in the 1820s that

the age of war was gone forever.That was the bloodless economic theory.

There need be no war if there was free trade and representative govern-

ment. But these same people failed to realize that a reaction had alreadystarted.A movement was developing in the opposite direction.

Among the opponents of the idea of freedom was Auguste Comte. It

is this reaction against freedom that splits the world into two camps today.

Paradoxically, those who support the groups that favor imprisonment,

persecution for deviations, and so on, are called “progressives.”

The “ethical economists” who opposed the “materialism” of the

bloodless economic theory of the British, became the predecessors of

what was later called Nazism. The Nazis, imitating the Marxists, wouldtolerate no opposition. A good German could have only German ideas;

everybody should be forced by the laws of nature to think according to

the “natural” interests of his race or nation. The Nazis had difficulty

explaining such persons as Beethoven, Goethe, Kant, and so on, all

Germans, but Germans who had un-German ideas. Now, in view of later

events, we can ask whether or not these Nazi ideas, imposed on the

German people ostensibly for their own good, were really so useful to

them in the long run.Some modern communists allege that they anticipated the success of

Nazism. But they did not! On the contrary, not a single one foresaw it. In

40








ONE OF THE PROBLEMS WITH WHICH AN ECONOMIST MUST STRUGGLE

is the fact that the terminology of business was developed prior to the

development of economic theory, so that the language is not particularly

appropriate for dealing with economic problems. One such case, which has

resulted in real difficulty, is that of the money market.At the end of the eighteenth century the British economists found the

“money market,” which was concerned with the lending of money to

businesses.The terms “demand for money” and “supply of money” were

already in use to signify the demand for, and supply of, loans. These terms

were so firmly established that they could not be used for dealing with

monetary problems, that is, for dealing with the demand for, and supply of,

money as such. On the contrary economists had to point out that the rate

of interest and the demand for loans on the market did not depend on theamount, or quantity, of money in existence.They had to point out that there

was a demand for money, for cash money, independent of the demand for

l o a n s. As the stock market and the money market became more

and more familiar to the people through newspaper re p o rt s , this

was difficult for them to understand. Almost every newspaper used this

business terminology to report on the state of the money market, i.e.,

the loan market.

Economists pointed out that there exists on the market a demand for money and a supply of money similar to the demand for, and supply of,

any other article. It should be noted parenthetically, however, that this

43

Money and Inflation

6 T H L E C T U R E



demand for, and supply of, money has nothing to do with the demand for,

and supply of, loans. It is significant also that while the demand for most

goods is a demand for consumption, the demand for money is not a

demand for consumption; the demand for money does not consume or

destroy the individual piece.The demand for money per se is a demand to

hold money, a demand for “cash holding.”

Because future conditions are necessarily uncertain, people must keep

a definite amount of cash on hand. Should things be certain, they could

invest every bit of money for a definite time. Knowing exactly when they

would need cash, they could plan to have their investments mature at that

time. But because one cannot estimate exactly when money will be

needed, one must keep a certain amount of cash on hand or in a checkingaccount; one cannot lend or invest all one’s cash money.

Money in circulation is the sum of all cash holdings. Concerning the

history of an individual money piece, there is no money piece that is not

held by somebody, i.e., no cash that does not occur in somebody’s cash

holding. It goes from one person’s cash holding to another person’s cash

holding. In the case of any particular money piece, there is no instant

between these two situations.There is no such thing as money that is not

owned by someone and the disappearance of which in some way, for instance by fire, would not hurt the individual whose money it was.

False definitions, incorrect explanations and interpretations, of money

fall into two classes, namely that money is either (1) something more than

a commodity, or (2) something less than a commodity. But in reality

money is neither more than, nor less than, a commodity; it is everything

that a commodity is. Like any other commodity, the supply available

influences its market value and like any other commodity, it is in demand

because people consider it useful.Because there is a demand for money for cash holdings, and because

people are ready to part with goods to get money, the value of the object

used for money is enhanced by this demand.The value of gold increased

when it came into demand for monetary purposes. Similarly, the value of

silver rose when it was demanded as money. When money conditions

changed in the course of the nineteenth century and silver became less

important for use as money, its value per unit, its purchasing power, tended

to go down.

Inflation is an increase in the quantity of money without a correspon-

ding increase in the demand for money, i.e., for cash holdings. I do not

44






immediately rather than to wait until tomorrow, or until next year,because

then prices will be still higher. In Germany after the first World War this

was called Flucht in die Sachwerte —flight into true values.

This is a characteristic of every inflation that is not stopped in time.

The first period may last many years; the government is then triumphant.

The second period lasts for only a very short time. In Germany the first

period lasted from August 1, 1914, until the end of September 1923; the

second period lasted only three or four weeks. The second period in

Germany was characterized by the fact that the workers were paid every

morning in advance.Their wives would go with them to work; each man

received his money, handed it immediately to the Mrs., and then she went

to the nearest shop to buy something—anything—just to get rid of themoney. To buy something was better than to keep the money which would

lose value by tomorrow.

Such inflationary adventures have happened several times in the course

of history. Most have been stopped by the governments before the second

period.The three most important times when inflation has run its course

are (1) the United States with the Continental currency in 1781, (2) France

in 1796, and (3) Germany in 1923. There have been inflations in other

smaller countries too, such as Hungary, but they were not so important.The situation of the southern states with their Confederate currency

in 1865, was another matter. It could be said it was different because the

Confederate government itself broke down with the defeat of its forces.

In the twentieth century, Karl Helfferich [1872–1924], an excellent

writer and a gifted economist but who lacked the qualities that make a

man stand up for his opinions in public, invented a slogan: the money of

the victorious nation will prove to be the best and will retain its value after

a war. But this has not been the case in history. In the United States in1781, the colonies were victorious; they had just defeated a great country,

Great Britain, and yet the Continental currency degenerated. Also in 1796,

France had been successful in military campaigns, and yet she suffered

inflation. Helfferich was doubly wrong when it came to Germany—first,

in thinking Germany would be victorious in World War I, and secondly, in

believing that its money, as the money of a victorious nation, would

necessarily be good. Helfferich failed to realize that whether a country is

rich or poor doesn’t matter—when it comes to inflation what is important

is its basis for putting additional money into circulation.

Every inflation that isn’t stopped in time consists of two periods—the

catastrophic crack-up boom, which is very unwelcome, and the runaway

46




47

inflation. It is an economic law that things happen in this way. The

length of the first period depends on conditions which we may call

psychological; it depends on the minds of the people, on their judgment,

on their trust in their government. And it depends on their ideas, on the

pseudo-economics with which they have been indoctrinated. So it is

impossible to estimate how long the first period will last.

The Germans were definitely indoctrinated. They had confidence in

their government. Even as late as October 19, 1918, they believed they

would be victorious in the war and they thought their money was safe.

They blamed the speculators for raising the cost of the U.S. dollar. The

unsophisticated eighteenth-century farmers in the United States and in

France had better judgment in these matters than did the sophisticatedbankers in Germany. Let us not forget that the German banks broke

down in this period because they were ignorant of the problems involved

in the inflation.

This leads us to an explanation of why price controls cannot work.

The government increases the amount of money. This is the inflation.

Everybody has more cash in their cash holdings than before.The result is

that the individual has a surplus of money which he hasn’t spent for

daily consumption. In his eyes this is a surplus cash holding. If he doesn’tprefer to buy some luxury goods, he wants to invest a part.The small man

invests it in savings banks or insurance policies.The big business enterprise

appears with this amount directly or indirectly on the loan market. For a

while the government succeeds in keeping prices down. Price control

doesn’t remove the danger. But by making it easier for people to buy at

low prices what they would have bought anyway, it increases the amount

of money in their pockets, in their cash holdings, which is available for

other purchases.The inflations of the two World Wa rs in this country we re com-

paratively mild because a great part of those workers who had earned

additional money tended to increase their cash holdings during the war.

The small worker really did increase his cash holdings in anticipation of a

post-war move and because some goods were not obtainable during the

war—radios, refrigerators, automobiles, and so forth.This is a characteristic

of the first period of inflation. Remember the housewife who says,“let us

keep the money; next year prices will be lower.” But as soon as people

discover that things may be otherwise, the catastrophe may occur. These

explanations of the simple man make the situation critical and dangerous.

Today [1951] there is still powerful resistance to inflation.There is still

M O N E Y A N D I N F L A T I O N



a lot of talk about the necessity of restricting inflation. It is true that

90 percent of this talk is just nonsense consisting, for instance, of plans

to conceal the inevitable effects of the inflation by price control. But

nevertheless, as long as there is such a resistance and as long as the govern-

ment and Congress are forced to concede that there is danger in inflation,

the danger is not yet great. The breakdown occurs when government

officials no longer care what happens and fear that they may not be in

control later.

During the last World War in most of the countries the economists

were prevented from saying what was happening in their own country

because of censorship. Or they were prevented from talking because they

were in the army. But in the first World War, not all the countries wereinvolved. In Sweden,which was neutral, there was an economist, Professor

Gustav Cassel [1866–1945]. As a neutral, he had the privilege of visiting

Germany one week, England the next, and in between of stopping in the

Netherlands and Belgium. He wrote about what he saw. Cassel told the

Germans, “You are inflating your currency and your profits are not real

profits but illusionary profits.” He told them they must take the additional

money out of the system (1) by taxes and (2) by loans. But the Germans

did not have the courage to tax those who had received the extra part of the money. They tried an excess profit tax, which removed only a small

part.They tried loans in this way—in order to buy 100 Marks of such a

loan, the citizen had to pay only 17 Marks and the remaining 83 Marks to

pay for the loan were provided by the government’s printing new

banknotes. Thus, every new issue of bonds meant an increase in the

amount of money.This shows how even the best advice is useless in the

hands of people who have such ideas.

Now I want to deal with the second problem. In the second part of the eighteenth century, Great Britain was on the gold standard.This was

evident to everybody because there were gold coins in use every day in

daily business transactions.Also in use were notes of the Bank of England

and, at that time already, the beginning of checkbook money. The

banknotes were used as money substitutes and were redeemable immedi-

ately, without any delay or excuse.This was the gold standard as it existed

in England in the eighteenth century, and as it was adopted in the course

of the nineteenth century by the more important continental countries

of Euro pe—F r a n c e, G e rm a ny, the Netherlands, B e l gi u m , and the

Scandinavian countries.

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49

Adam Smith had suggested that if all travel could be done by air, the

land then used for roads could be put to more productive use such as

farming. In this same vein, economists began to ask whether or not it was

really necessary that mankind devote a part of its toil and trouble to the

production of precious metals in order to have a good currency. If one

could construct a currency with less expense, it would be advantageous. In

1819, Ricardo reasoned that one could do away with gold coins and have

only banknotes which should be redeemable, not in coins, but in ingots,

bullion. This gold bullion could be used for international transactions.

This would save the money involved in making gold coins in smaller

denominations. For more than 60 years Ricardo’s suggestion remained

a “dead letter.”In the 1870s, countries, that were having a hard time financially and

yet wanted to get on the gold standard in the cheapest way, discovered this

solution of Ricardo’s. It was called the “gold-exchange standard.”Toward

the end of the nineteenth century and the beginning of the twentieth,

many countries adopted this type of gold-exchange standard. It differed

only in degree from the classical gold standard. On behalf of the American

public, Professor Jeremiah Jenks [1856–1929] of New York University

studied this gold-exchange standard in the Far East—the Malayas,the British West Indies, and so on. He was enthusiastic, as was his assistant,

P rofessor Edwin Walter Ke m m e rer [1875– 1 9 4 5 ] . People didn’t see

anything questionable in this theory. I can’t say that I was enthusiastic

myself, but I couldn’t see any reason why it shouldn’t be adopted. One

German economist said that by concentrating all the gold in the hands of

the government, it would make things easier in time of war.What it does

is to make it easy for the government to manipulate the currency, which

always means to manipulate it downward, thus preparing the way for inflation.When a country has a gold-exchange standard and no gold in

daily circulation, no one realizes what it means when the government

declares that banknotes are no longer redeemable.

When the first World War broke out all the countries went on the

gold-exchange standard. There was still a little gold in circulation, but

not very much. Even the countries on the gold standard had gradually

approached the gold-exchange standard more and more. Soon in place of

the gold-exchange standard fiat money standards came in all countries.

After the war, all countries were eager to return as quickly as possible to

the gold standard. But most only returned to the gold-exchange standard






51

boroughs only by the amount of transportation charges. If there were a

custom barrier, conditions would be different. So it is with money.

If Brooklyn had a separate coin system from Manhattan, the exchange

ratio between these two moneys would be established at such a height

that it would make no difference whether the commodity was bought

in one place or the other, with one money or the other. Should a

difference appear, immediately there would arise an opportunity to

make an advantageous deal. This advantage would continue until the

difference disappeared.

We speak in the same way of Great Britain’s devaluation in 1931 when

it went off gold, and her devaluation of two years ago [September 18,

1949] when the rate was changed from $4.03 to $2.80. But these are twoabsolutely different things—they have nothing in common. In 1931,when

the British abandoned the gold standard, the amount of foreign money or

gold that the owner of a British banknote had been able to obtain was

reduced. It was intended by this means to keep the British currency stable

with reference to foreign currency. The British government assumed a

monopoly in the trade of gold and foreign exchange and the right also to

expropriate foreign exchange. In revaluing,what they had had in mind was

changing the rate at which British holders of foreign money would beindemnified on the one hand, and on the other hand the rate at which the

importer would get his foreign exchange from the British government.

Two years ago in Great Britain, the $4.03 parity was a historical fact

like any other historical fact. It was a parity de facto —it was the legal norm

for the expropriation of Britishers who owed foreign money, and the price

they had to pay for foreign money. But in fact the pound on the world

market was worth only $3.00, more or less. In a treaty with the United

States the British government promised that on a certain date they wouldagain begin to redeem their currency against gold, dollars, and so on. But

the British government no longer had clever bank-economist advisers.

They had not considered what it would mean if it should be possible to

redeem the money in London in the relation of three to four; anybody in

the world would be able to buy a pound for $3.00 outside the United

Kingdom and then sell the same pound to Great Britain at $4.00. After

four or six weeks they discovered that this was completely unrealistic.






53

various commodities and services to the same extent and at the same time,

then the only consequences would be its repercussions on the content of

old contracts concerning deferred payments, loans, and so on.

Let us deal with the social consequences due to the unevenness and

lack of synchronization in the change of purchasing power brought about

by inflation or deflation. Should these changes occur everywhere at the

same time and to the same extent, people would discover one morning

that the purchasing power of the monetary unit had changed overnight.

But otherwise there would be no difference; the prices of the services they

had been selling would also have changed by the same amount and in the

same direction.

In inflation, the additional quantity of money enters the economicsystem through the wealth or income of definite individuals. If the

government prints the money, the government is the first to get the new

money.Additional demands and offers raise the prices for the products the

government wants to acquire. The persons selling the commodities and

services the government wants sell at higher prices. Then munitions

workers, munitions entrepreneurs, and the soldiers all receive more than

t h ey did ye s t e rd ay. These pers o n s , in whose cash holdings this

additional money appears, are in the position of being able to offer moremoney for their purchases. They have more money and larger incomes.

Consequently they can spend more and they offer higher prices for the

commodities they purchase. But these people don’t buy everything.

Perhaps they buy beverages but not books.

There is now a second group favored by the increase in the amount of

money, let us say the beverage producers who are getting more for the

services and commodities they sell.The members of this second group are

now in a favorable position because the services and commodities that theywish to purchase have not yet been affected. But other individuals—

teachers and ministers, for instance—are still paid the former rate; in

spite of the fact that the additional money has not affected the services

they are selling, they must pay more for commodities that others have bid

up in price.

In such an inflationary period there are losers and winners. The

winners are the munitions workers, those selling products which go up in

price at an earlier date than the commodities they are buying. As long as

this continues there are problems every day.The winners are satisfied and

keep silent; they don’t write letters to the editor to say that this is a

wonderful thing.The entertainers, beverage salesmen, and others do good

T H E G O L D S T A N D A R D : I T S I M P O R T A N C E A N D R E S T O R A T I O N



business at the time—they are the winners—they don’t talk, but they

enjoy prosperity and spend.The losers are the other way round.Those at a

disadvantage feel it.The housewife whose husband is still earning the same

salary and has a number of children to feed is at a disadvantage. Until the

inflation ends and for a long time afterwards there are losers and winners

because such maladjustments exist. One hears in public only the voices of

the losers.

In deflation, the same thing happens, but the other way round.There

is a decrease in the amount of money. Those whose selling prices drop

first of all are the losers; the winners are those whose selling prices drop at

the end.

These price changes are the most spectacular effects of inflationary anddeflationary changes in the amount of money.

Another characteristic of inflation is that all deferred payments are

changed in their importance. If on the eve of the inflation you had

borrowed $100 which could at that time buy ten A’s and if after six months

as the result of the inflation, $100 can buy only five A’s, what you pay back

to the creditor is worth less than before. You could, therefore, borrow

money, buy ten units of A, wait six months and sell five units of A for $100

to pay back your loan; your net inflation profit would be five units of Aworth $100; you, as the debtor, profit.The man who saved, the creditor, is

hurt by the inflation. In order to deal with today’s problems, these things

must be kept in mind.

Before the war of Great Britain against Napoleon from the beginning

of the nineteenth century to 1815, there had existed in England the clas-

sical gold standard—there were gold coins, and there were banknotes of

the Bank of England in use as money substitutes.The Bank of England

notes were redeemable in gold on demand; the paper was a gold substitute.Because people could get gold without delay, Englishmen took the notes

without any hesitancy. This gave the government the idea of borrowing

from the Bank of England and the British government found that was the

easiest way to get money. As a consequence of their borrowing the quan-

tity of domestic money increased and prices rose.With the rise of prices in

Great Britain and not in foreign countries, merchants found it advanta-

geous to import. In order to pay for these imports it was necessary to

export gold. So more people asked for redemption of the banknotes.The

managers of the Bank of England became alarmed and feared bankruptcy.

The government suggested a very easy remedy; they passed a law relieving

54




55

the Bank of England of the obligation of redeeming their banknotes; they

suspended the payment of specie.The law made meaningless the statement

on the banknotes that they could be redeemed.

The government borrowed more and more. A higher price for gold

resulted. Gold coins were handled at an additional premium.The official

rate before the Napoleonic Wars was one ounce of gold to £3 17s 101/2 d.

In 1814, shortly before the end of the war, the actual price in terms of the

Bank of England notes was £5 4s. The gold price had risen almost 50

percent in terms of British pounds; in other words, the value of the British

pound had declined.

After the war of Great Britain against France ended, Great Britain

decided to return to the gold standard.The only method considered wasto deflate and return to the pre-war parity—£3 17s 101/2 d per ounce of

gold. So they reduced the amount of money; they contracted.To deflate

the government must borrow from the public—not from the banks. And

it must not spend the money which comes in; it must destroy it. This is

difficult as you can imagine. You will rarely find Ministers of Finance who

are ready to do this. But at that time it occurred—because they believed it

was the only “honest” and “just” way.

Now, let us see how “just” and “fair” such a method is. If a man hadcontracted a loan before 1797, and had not yet paid it back, it would have

been correct to say he should pay the pre-war value. But don’t forget that

many people had borrowed money during the period of the suspension of

specie payment on the part of the Bank of England. Many British farmers

especially, who wanted to improve their property to assist England to

survive the war when imports were not easy, had mortgaged their farms

and received the devalued or “light” pounds.And now came a law which

required them to pay back “heavy” pounds. Is this “fair”? Is this “just”?For these farmers there was still another complication. When peace

returned, imports increased and they had to compete against more imports

than before the war. While their debts and their payments of interest

and principal increased, the price of their products dropped. These two

factors contributed to a tremendous agricultural crisis in Great Britain

in the 1820s. Among the important consequences of this crisis was an

intensification of the Corn Laws, which were later abolished in the 1840s.

The government was also a borrower and had borrowed “light”

pounds.Yet according to the new law the government—which was the

taxpayers—had to pay back “heavy” pounds.Thus a privilege was granted






57

to the gold standard. Even the most stupid man in England should have

known that the British labor unions were adamant in their demands for

higher wages and that wages had been raised to such a point that there was

permanent unemployment, with millions of persons out of work.Yet, in

the face of such a situation, the British government increased the value of

the pound. They made the “light” pound the “heavy” pound, thus

increasing the real wages of workers without any change in the number of

jobs.The result was that British production costs, which were already high

under the existing wage rates, too high for the world market, were

enhanced even more.

Great Britain made a bad mistake by returning to the pre-war parity

of the pound in 1925. This added to the income of persons who hadbought bonds or otherwise lent money in “light”pounds.The government

had to collect more taxes to repay those bonds in “heavy” pounds. A

catastrophe resulted. The United Kingdom cannot feed and clothe its

population out of domestic resources; it must import food and raw

materials and pay for these with manufactured goods, most of them

produced from imported raw materials. They found themselves in a

situation where they were unable to export enough to preserve their

standard of living. Labor unions would not consider a reduction in wages.To avoid hurting the interests of those who lent “heavy” pounds, it

would not have been necessary to return to the pre-war parity. It could

have been arranged that a loan contracted in 1910 would be paid back in

a higher number of pounds than when contracted. Although this might

have helped, it wouldn’t necessarily have been “just” or “fair,” because the

bond might have changed hands several times.

Because of the problems that developed, the government capitulated

in 1931, by devaluing the pound four times more than it had beendevalued before 1925.This meant that Great Britain, still a great creditor

nation, made a gift of hundreds of pounds to foreign debtors who, after

1931, could pay their debts to Britain in “light” pounds. What kind of

statesmen were these? Winston Churchill, as Chancellor of the Exchequer,

was badly advised.

Now in the United States, we have the question of how to return

to the gold standard. In my opinion, there can be no question as to the

necessity for doing that. But the question is at what parity we should

return. Should it be determined through stabilization, by abolition of the

laws against holding gold, and stopping the increase in the quantity of

money? Within a short time after some haggling, there would be more or




less a price for gold which would not affect the purchasing power. One

could then return to the gold standard. Leaving aside the problem of old

debts, this wouldn’t change anything—this wouldn’t destroy the whole

economic system.

But there are among the minor ity favo ring a re t u rn to the gold

standard very eminent men who favor resumption of specie payment at the

rate of $35 an ounce.They say this is the only “honest” solution. I don’t

k n ow why these gentlemen are precisely in favor of $35. One mu s t

stabilize at the present-day gold value of the money without deflation.To

return to the gold standard at $35 per ounce of gold would cause a

deflation, because today [1951] $35 is no longer considered the equivalent

of an ounce of gold.The price of gold is much higher, as can be seen fromthe quotation of the American dollar in Switzerland and other neutral

countries. If the American government redeems the dollar at $35 there

would be a tremendous withdrawal of gold from this country, which

would make the whole thing unpopular.

If one wants to deflate after considering all of the tremendous

disadvantages of deflation, if one wants to go back to an old value which

has only a theoretical value, why go back to the New Deal value, which

was never anything but a specter in the law books and never had any realsignificance to Americans? Why not go back to the original old United

States dollar—$20.67? Why just the New Deal dollar? They say it is a

statutory dollar. Of course, $35 is the rate for foreigners, not for

Americans—it is a criminal offense for Americans to own gold—at which

governmental international dealings are made. [The prohibition against

owning gold in this country has since been repealed. In January 1975,

U.S. citizens regained the freedom to buy and own gold.] Many gold

producers have been forced to sell gold. But US$35 is not the realmarket parity for gold. I don’t see why anyone should want to take on the

disaster of a deflationary movement. Deflation is so very unpopular. Its

unpopularity is exaggerated, but it couldn’t work because people are so

opposed to it.

I see only one way to return to the gold standard—abolish laws against

holding gold, re-establish the gold market and see what rate establishes

itself. This would cause the least possible disruption.The greater part of

gold is outside of this country.The U. S. government could keep quiet for

a time, and not enter the gold market.There would be a drop in the price

of gold on the black market. Nobody can know in advance how much the

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63

loan market. An increase in the amount of money appearing on the loan

market brings about a drop in the monetary rate of interest. How does this

readjustment take place? This is the problem of the trade cycle.

In dealing with money substitutes and fiduciary media, i.e., that

amount of money substitutes in excess over the reserves of the bank, we

must never forget that the position of the banker or of the bank issuing

such fiduciary media is delicate.Only if the banker has the good will of the

people can it be assumed that they will be willing to hold these excess

money substitutes and not present them for redemption, which would

push the bank into bankruptcy. It is even more important to realize in the

first place that it is not very easy to make the people accept money

substitutes as money. Originally money substitutes were looked on withsuspicion;people were not very enthusiastic about accepting them in place

of gold. It is difficult for our contemporaries to realize this, because money

substitutes protected by the government have appeared in recent years and

been forced on the people by the government. Moreover, today these

money substitutes have been declared to be legal tender, so that if a debtor

wants to repay a debt, the creditor is bound by law to accept the money

substitutes as if they were real money.

Propagandists who wanted to make the government pre-eminent inthe issuance of money substitutes have publicized many stories about

private money substitutes. These tales were condensed by an anonymous

American who is credited with the dictum “Free trade in banking is free

trade in swindling.” Economists, however, think differently; they consider

free trade in banking as the only protection against the government’s

issuance of bad banknotes.

The main problem is that unfortunately all people, even in the age

of liberalism and classical economists, consider the rate of interest as amonetary, not a market, phenomenon.The classical economists explained

that prices and wages were market phenomena, but they were not so

anxious to say that the rate of interest was also a market phenomenon.This

is one of the weaknesses of Adam Smith’s The Wealth of Nations. He refuted

the idea that a scarcity of money can make business bad. But he was not

prepared to attack the age-old laws against high interest rates, the laws

against “usury.” Jeremy Bentham, in his Defense of Usury [1787], which is

still in use today, was the first to refute these old ideas of interest.

People considered high interest rates a barrier to economic trade and

progress, and felt that anything that might lower the rate of interest a

M O N E Y , C R E D I T , A N D T H E B U S I N E S S C Y C L E



blessing. Consequently an increase in money substitutes was considered a

blessing because with it came a lowering of the rate of interest. All other

things remaining equal, if an additional offer of loans by the person making

the money, by the bank of issue, is made, the would-be lender must

d rop the rate of interest to attract additional borrowe rs . This was

considered advantageous and there was enthusiasm for it on the part of

public opinion.

It is tragic and fateful that not all liberals realized that the rate of

interest was an economic,not a monetary, phenomenon.These liberals not

only failed to fight, but they even aided the foundation of additional

government central banks with special privileges because they thought

these banks would lower the rate of interest. The consequence was alowering of the interest rate in the short run, a short-run boom—but later,

inevitably, after some time, the appearance of an economic crisis, a

depression. People began to consider periodical depressions and the trade

cycle as inherent characteristics of capitalism. This has been one of the

main arguments for socialism and one of the main causes of making people

anti-capitalistic. The effect of the 1929 depression in this county is still

evident in the erroneous interpretation of this experience by the people.

As a consequence of the belief in the advantages of low interest rates,credit expansion became very popular—at first in those countries where

there was capitalism and a banking system. At the end of the eighteenth

century, Great Britain was already suffering from the consequences of

recurring economic crises. Later these crises began to affect other

countries—at first the European countries that were more advanced in

capitalism—the Netherlands, France, and the most advanced city-states

of Germany, Hamburg, and Bremen. These periodical crises came to

other countries only with the spread of capitalism. For instance, in thedepression of 1857, Austria was still rather backward in the capitalistic

development so that she was affected only very slightly. The Austrian

government did something which was very spectacular for those days. For

political reasons, Austria wanted to aid Hamburg. She shipped a full

trainload of silver under heavy soldier guard to Hamburg to support

Hamburg’s banking system.At that time,Austria was still out of the world.

But in 1873, when the next depression came, Austria was so much

involved that Vienna was the center of the crisis.

Economists began to raise the question as to what caused these crises.

Say’s Law demonstrated only what could not be considered the cause—

overproduction. A little later a group of English economists and bankers

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67

a low interest rate. Credit expansion was considered a vehicle to lower the

rate of interest.The politician wanted prosperity for his country, and for

the people.Governments wanted to keep interest rates low; even Coolidge

in 1924 wanted low interest rates. It seems to me astonishing that attempts

have been made to raise and lower wages, to raise and lower prices, but you

will never find an occasion when a government or politician was in favor

of raising interest rates. I don’t mean to say I am in favor of a high interest

rate—I am for the market rate.

When governments first fathered central banks, the aim was to create

prosperity by lowering the interest rate. But later governments favored the

central banks with special privileges because they wanted to borrow

money themselves and they considered the central banks a source of cheapmoney.This was a wonderful discovery by the governments. First of all, the

g ove rnments granted the central bank legal-tender status for their

banknotes and freed them from the obligation of keeping their contracts

to redeem their banknotes in gold or silver, banknotes which people had

accepted voluntarily. (How different would have been Charles I’s fate—he

was beheaded in 1649—if he had been able to finance his military

ventures without worrying about Parliament and the taxpayers.)

Now I want to discuss the consequences of artificially cheap interestrates. It is agreed that the problem is the trade cycle, the credit expansion,

that we must fear the boom which results in a depression.The League of

Nations made a re p o rt , p re p a red by Professor Gottfr ied Haberler

[1901–1995], on the trade cycle. On its first pages it is clearly stated that

the boom which causes the following depression could not occur if the

banks did not expand credit. Therefore, one would think the solution

would be easy—we have only to prevent the banks from expanding credit

or at least from adopting governmental institutions and policies whichinvite the bank to expand credit. But no—they began to look for another

explanation of the cycle. Marxists recognize that one cannot do away

with interest entirely by credit expansion, but they deny that lowering

it artificially will have evil consequences.They ignore the fact that the rate

of interest is the expression of the difference between the market valuation

of present goods as against that of future goods.

What really takes place in a credit expansion? Why do we say that

certain things may not be done because capital is lacking? Certain projects

not feasible today could be effected by cutting down present consumption

enough to permit more producers to build more durable investment

goods. Everyone contributes a share to the determination of how much is

M O N E Y , C R E D I T , A N D T H E B U S I N E S S C Y C L E



to be consumed and how much is to be invested. The individual

entrepreneur is aware of this fact because of the rate of interest. If people

are more willing to save, the interest rate will drop. On the contrary, if they

are ready to spend, the rate goes up. The entrepreneur in planning

estimates anticipated costs and prices, takes into consideration costs of

labor, material, and the rate of interest. If he decides a certain project

cannot be done profitably, then it is not done. There are always projects

which are not undertaken because the money is used for consumption.

The rate of interest is lowered artificially by credit expansion, so that

a project which appeared unfeasible yesterday may today appear profitable.

Therefore, the effect of credit expansion and of the lowering of the

i n t e rest rate is that certain projects which would not have beenundertaken are now started. If we think it over, we realize this is not good.

There has been no increase in material goods.The only difference is that

the bank has created out of nothing additional banknotes or additional

checkbook money.

The consequence is that the businessman’s calculation is falsified.

While before it reflected precisely the conditions of the available factors of

production and demonstrated what could be done and what could not be

done, it is now falsified, for there exists an additional amount of moneysubstitutes and fiduciary media.The businessman is led, by artificially low

interest rates, to embark on projects for which the available supply of

capital goods is insufficient. (Suppose a man owns a limited amount of

building materials.The contractor makes an error in estimating so that the

foundation is too large for the material actually on hand. He should have

realized before that the amount of material would not suffice. A crisis

results for the master builder.)

It is more difficult in life. The additional demand for projects whichwould not have been undertaken earlier raises the prices asked for the

materials. True, the rate of interest is lower. But prices are higher. The

whole thing must stop if the bank’s credit expansion comes to an end. But

bank credit is elastic, and the banks give more credit.

As wage rates go up, the demand for consumer goods goes up also. But

because the boom seems general, the entrepreneur decides to go ahead

with the project. Higher prices for the factors of production, including

labor, result.And there is a further increase in consumption.

Also of importance is the fact that the banks, when faced with this

increased demand, begin to raise their interest rates. In every crisis cautious

people tell the bankers,“It is an over-expansion.The expansion should be

68






This is an impossibility. The amounts available for investment are (1) the

savings of past years, and (2) that part of the previous year’s production

equal to the equipment used up in the past years and available for replace-

ment of worn-out tools. (The replacement of old machinery may be made

by substituting better or different machines. In this way, many producers

have completely changed their production.) Nothing else is available for

investment, so there cannot be general over investment.

When the available past savings (1) and capital available for replace-

ments (2) are invested according to a plan that over estimates the amount of

investment goods available, the result for the whole national economy is

mal investment. Construction is started calling for more material than is

available. It has been said that the 1857 crisis in Great Britain was due tothe fact that they had built too many railroads.At that time those railroads

were unprofitable and capital was lacking for other requirements. Too

much circulating capital had been converted into fixed capital. In the crisis,

goods for consumption are available at very low prices as there is a surplus

of consumer goods.

An individual can overexpand. One can say, “My personal financial

situation is very bad. I spent too much money in expanding my business,

in building my new factory.” The overinvestment idea appeared whenthis situation, applicable to an individual, was transferred to a nation. But

it cannot be true for the whole economic system because only those

goods which are available for investment can be used for that purpose.

Money can be invested in the wrong plans, and too many projects can be

started so that some of them cannot be finished, or if finished they can be

used only at a loss.

It is obvious what happens. The question is why the situation is

suddenly discovered in only a few days, so that the crisis comes overnight.Where there was confidence and optimism, there is depression and despair.

Of course, it is only the insight that comes overnight, not the real crisis,

which has been building over time.

Because there was no uniformity in credit expansion in various

countries in the past, the extent of the credit varied in the different

countries.With the demand for foreign exchange and credits, there was a

drain of money from some countries. Bankers became frightened. A

government official announced, “Maybe we will be forced to restrict

credit.” The businessmen became frightened: “We need credit. Let us,

therefore, get credit as long as there is any possibility.” The demand for

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ABOUT THE END OF THE NINETEENTH CENTURY, when people began to

realize that there was something questionable about credit expansion, the

defenders of this policy found a new excuse. They declared that credit

expansion could work in an isolated country which did not connect with

the rest of the world through the medium of the gold standard. Byabolishing the gold standard and establishing a free-of-gold currency or fiat

money system it would be possible to expand credit, lower the rate of

interest, and make the country prosperous forever.This attitude was evident

among the German Junker s who suffered in the 1880s and 1890s from the

importation of American cereals. However, they ascribed their misfortune

to the gold standard, not to their poor soil and the low yield per acre.

They said if it were not for the gold standard they could enjoy a low rate

of interest and prosperity.The influence of these ideas was apparent when the Italian minister of

finance declared that a conference of the banks was needed. Toward the

end of World War II, these ideas led to the establishment of the

International Monetary Fund (IMF).The British government suggested an

international bank and in order to create favorable public opinion for an

“International Clearing Union” published a pamphlet written by Lord

Keynes.This pamphlet, distributed in this country by the British propa-

ganda office, declared that credit expansion was most desirable. In Keynes’sown words, credit expansion had brought about the miracle of “converting

stones into bread” within nations and it was now necessary to do this on

73

The Business Cycleand Beyond

9 T H L E C T U R E









77

depression does not mean an impoverishment of the country. Actually it

reflects a more accurate picture than the preceding boom. But due to

psychological reasons and the political situation caused by the depression,

by the drop in prices, and the decline in production, it may go much

farther than necessary to re-establish the preceding conditions.

Literature on the trade cycle, especially the earlier material, took

sadistic pleasure in describing in detail all the phenomena of the depres-

sion. Sometimes paradoxical phenomena appear. But we must not fail to

realize that the depression is the return to reality and the attempt to make

well, as far as possible, the deficiencies produced by the preceding boom.

During the nineteenth century there was an almost regular recurrence

of booms and depressions.This is what has been called the “trade cycle.”As soon as conditions begin to be normal, the people and the government

call for a new credit expansion and the boom begins again.

The people came to consider the trade cycle as an inevitable trade

phenomenon, and they began to study the length of the cycle. All efforts

to estimate the length of the trade cycle are more or less fantastic. Because

some economists declared that the length of the cycle is eleven years, the

idea arose that it is not caused by social and human events, but by cosmic

events.The sunspot theory was developed. Such theories are merely guess-work. In the first place the cycle is not eleven years.Also, if true, why does

business, which adjusts itself to nature, climate, fertility, and other condi-

tions, never realize that and adjust its activities to the sunspots? There is not

the slightest empirical proof that the cycles and sunspots coincide.

But a regularity of some kind was recognized. There is some feeling

that the trade cycles are a new development which came with the banking

and money system of modern times. But is the trade cycle inevitable? If

capitalism continues, will this phenomenon prevail in the future as it hasprevailed in the past? The science of human action should not be confused

with the natural sciences.Trade cycles originate as the outcome of a human

action—credit expansion. Will the trade cycle remain if this knowledge

becomes general? Certainly not! If everybody realizes that the credit

expansion is the cause of the following depression, governments and

people will probably learn that credit expansion is not to their advantage

and it will be discontinued.

On the other hand, let us assume that governments and public

opinion, in spite of this insight, stubbornly cling to a policy of credit

expansions from time to time.Would it not be probable that the reaction

of the individual businessman to credit expansion would be different?

T H E B U S I N E S S C Y C L E A N D B E Y O N D



Might not business itself, in spite of the governmental incentives,

make adjustments so that business would be more stable? Suppose the

government embarks on credit expansion and the businessmen feel it is

questionable. Instead of expanding their operations because expansion was

possible, they might become rather cautious and not expand to the extent

possible. This is not such an impossible idea. Remember the New Deal

pump-priming.The New Deal wanted a boom but no depression. They

wanted to make only the initial movement and then stop expanding credit.

But the businessmen realized that the government was planning to stop

once the businessmen had started expanding and they did not fall into that

trap.

This makes me think the trade cycles which have occurred in capital-istic countries from 1780 on may eventually disappear. It would be a

mistake, therefore, to say that the trade cycle belongs to the market

economy and will not disappear as long as there is a market economy. First

of all, the trade cycle is not a market phenomenon but a phenomenon of

the credit expansion which is inserted into the market economy because

governments and public opinion believe that the normal operation of the

market economy doesn’t produce enough bridges and wealth.They believe

they have discovered the method for “converting stones into bread.” Iwould say the trade cycle may be only a passing phenomenon, one

evidence of the difference between the science of human action and the

natural sciences.

What is wrong in the boom may be described as disproportionality

between the various branches of production, between the producer goods

and consumer goods.Those who try to explain a general boom or general

nationwide losses as due to this disproportionality in business production

point out that there are durable consumer goods and producer goods.When a new invention, such as a refrigerator, comes on the market,

everyone wants to buy.That particular industry booms and expands. But,

it is asked, when everybody has bought a new refrigerator, how can the

industry continue to expand? The same situation applies, they say, to other

businesses—to the building trade, and so on. After everybody who wants

these durable and producer goods has bought, the demand falls off and

there is the depression. This idea is really fantastic because economic

expansion doesn’t take place in this way.

The monetary theory of the trade cycle explains the disproportionality

in this way. At first only a few buy the new gadget, and then more and

more.When the last ones buy, those who bought the early production need

replacements.Businessmen are not so stupid as to say that a business which

78












1. Anderson, Benjamin McAlester. Economics and the Public Welfare: Financial and Economic History of the United States, 1914–1946. New York: D.VanNostrand Co., 1949.

2. Cannan, Edwin. Money: Its Connexion with Rising and Falling Prices.

London: P. S. King & Son, Ltd., 1935. (Reprinted by Staples Press, Inc.,NewYork, 1945)

3. Cortney, Phillip. The Economic Munich: The I.T.O. Charter, Inflation or Liberty,The 1929 Lesson. NewYork:The Philosophical Library, 1949.

4. Hume, David. Essays, Moral, Political and Literary. First published in 1741,many reprints.

5. Weber, Max. Gesammelte Aufsätze zur Religionssoziologie (Collected Essayson the Sociology of the Great Religions). The first study in this book

has been translated into English under the title of The Protestant Ethic and the Spirit of Capitalism. London: George Allen Unwin Ltd., 1930. 2nded., 1948.

6. Wicksteed, Philip H. The Common Sense of Political Economy and Selected Papers and Reviews on Economic Theory. London: George Routledge &Sons, Ltd., 1935.

83

Miscellaneous ReferencesCited During Discussions









I N D E X

Gold, 67; as money, 44;

fluctuations in price, 55;

reserves, 59

Gold standard, 48, 52–61, 73;

classical gold standard in

England, 54–55; return

to, 52, 57, 58–59, 60

Gold-exchange standard, 49;

flexible parity, 50

Government intervention, 38, 41

Government monopoly of

gold trade, 51Great Britain. See England.

Greaves, Bettina Bien, ix, xvii

Greek civilization, 33, 34–35

Gresham, Sir Thomas, 34

Haberler, Gottfried, 67

Hayek, F.A., xiHazlitt, Henry, xv

Hegel, Georg Wilhelm Friedrich,

5, 21–22

Helfferich, Karl, 46

History, methodology of 7–9;

versus theory, 12

Hitler,Adolf, xii–xiii, 76

Human action, 7–8, 14, 16,

19, 77

Human Action (Mises), xiii, xviii

Hume, David, 25, 42

Hyperinflation, 69, 71, 81.

See also Inflation.

Ideas, power of, 42

Individualism, 7, 9, 12, 23

87

Industrial Revolution, 3–4, 21,

34, 35, 36, 37, 40

Inflation, 17, 59, 60, 71;

change in purchasing power, 45;

crack-up boom, 47;

definition of, 44; in England,

56; government and, 53;

historical examples of, 46–47;

losers and winners, 45, 53–54, 56;

manifested in price changes,

45, 54; periods of, 46;

resistance to, 48; runaway, 47;social consequences of, 53;

during World Wars, 47.

See also Hyperinflation.

Innovation, invention, 36

Interest rate, 43, 56, 63, 64, 66,

67, 68–69

International Monetary Fund,

73, 74Iran. See Oil industry in Iran.

Jenks, Jeremiah, 49

Jevons,William Stanley, 31, 66

Junker s, 73

Kant, Immanuel, 21

Kemmerer, Edwin Walter, 49

Keynes, John Maynard, 38–39,

50, 56, 73, 81

Kipling, Rudyard, 33

Labor unions, 28, 29, 41, 57, 59











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